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jjv508
Topic Author
Posts: 3
Joined: February 5th, 2021, 6:23 pm

Commodities trading

February 15th, 2021, 4:56 pm

Dear all, 

I have been given the chance to have an interview for an energy trading firm that uses algorithmic trading and alike. It occur to me that seeking popular wisdom here might help my odds. The position is in the quantitative risk management department. I have the following concrete questions: 

1) There is the point in the description of the job that I don't understand completely: 

This is a great opportunity to work with highly skilled people from diverse backgrounds and nationalities to oversee risks across multiple markets and asset classes including PPAs, VPPs, swings, options, LNG in an expanding business environment

What do PPA, VPP and LNG stand for? Could you refer to some references for the technical analysis behind swing commodity trading nor the modeling of dynamics for commodities return?

2) There is also this: 

    Advanced knowledge of risk metrics, option theory and understanding of commodity markets

Could you maybe refer to literature on commodity markets (general economics of it) nor common risk metrics used in the risk management of the products listed above?

Many thanks for your valuable time.

Thanks and best regards
José
 
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trackstar
Posts: 27919
Joined: August 28th, 2008, 1:53 pm

Re: Commodities trading

February 15th, 2021, 5:13 pm

Hi Jose,

I will pick off some of the low hanging fruit here and would certainly encourage you to google and do some basic research on terminology as it comes along.

If you compile things into a little personal dictionary, especially when you find useful resources (beyond Wikipedia), you can carry that along with you as you progress in your career. Devoting time to your research is essential in quant finance, in my opinion, and the more curious and active seeker of good information and references you can become, the better.

To tackle the acronyms you have listed in the energy space:

PPA - Power Purchase Agreement
VPP - Virtual Power Plant 
LNG - Liquified Natural Gas

You will also want to study volatility and history of markets, i think, just to have a general sense of what has gone on and what things are like now.

Here is a good place to study the varieties of commodities (energy) in the market:  Bloomberg - Commodities

See also Commodity Futures Trading Commission (US) - you can find the equivalent organizations s elsewhere in the world by simple searches.

On the literature, I would not get too hung up on technical analysis on its own (though others may disagree and could point your towards quality resources).  But on the quant side, you could look at some of the papers publicly available on SSRN, industry publications, and select journals if you have access. If you are at a university now, especially a business school, you may have pretty good access that way.  Look for articles and papers by practitioners or by academics who consult and partner with industry peers.

I will provide a few examples and perhaps a book or two shortly.
The spectacle is not a collection of images, but a social relation among people, mediated by images. - Guy Debord
 
jjv508
Topic Author
Posts: 3
Joined: February 5th, 2021, 6:23 pm

Re: Commodities trading

February 15th, 2021, 5:25 pm

Many thanks! I take attentive note :)
 
User avatar
trackstar
Posts: 27919
Joined: August 28th, 2008, 1:53 pm

Re: Commodities trading

February 15th, 2021, 5:34 pm

Here are a few papers and a book. Not all of this will be easy (or exactly what you might need for that particular interview), but in the spirit of immersion - these papers will give you some perspectives, terminologies, other papers to look at, and a few angles to pursue in your further study of the subject. 

When you get stuck on a concept or a term, dig around and starting putting the pieces of the puzzle together.

Good for a long takes/historical analysis:

The Fundamentals of Commodity Futures Returns - Gorton, Hayashi, and Rouwenhorst (NBER, 2013)

Facts and Fantasies about Commodity Futures Trading Ten Years Later - Bhardwaj, Gorton, and Rouwenhorst (2015) 
(also see the 2005 paper cited in this one)

Commodities for the Long Run - Levine, Ooi, Richardson, Sasseville (FAJ, 2018)

Improving Time-Series Momentum Strategies: The Role of Volatility Estimators and Trading Signals - Baltas and Kosowski (2013)

In Search of Crisis Alpha: A Short Guide to Investing in Managed Futures - Kaminski

and two books:

Energy Trading and Risk Management - Iris Mack (2014)

Trend Following with Managed Futures - Greyserman and Kaminski (2014)

There are many other books - and again, if you are at a university, you may be able to find a recommended reading list and even a syllabus if you look around in the finance department.

Industry organization often publish as well: CME Group, for example.

These are for thinking over and discussion - dive in at the deepish end!  I hope that others will add to and/or critique this approach to learning.
The spectacle is not a collection of images, but a social relation among people, mediated by images. - Guy Debord
 
User avatar
bearish
Posts: 6313
Joined: February 3rd, 2011, 2:19 pm

Re: Commodities trading

February 15th, 2021, 8:09 pm

For a live case study in pricing patterns, the current cold snap in Texas moved electricity prices there from $20 per megawatt hour a week ago to hit a cap (not exactly sure how that works) of $9,000 today. As somebody has undoubtedly said today - that’s an N standard deviation move! (where N is some implausibly large number, like 21). From a risk management point of view, I’d also encourage you to take a look at how and why WTI futures prices went deeply negative last spring.

I’m not a commodities guy, but have a friend who once bought a physical oil refinery and sold a virtual one, which is not unlike the VPP thing. Classically, futures markets were employed to implement a variety of spread trades, which might superficially look like you were trading commodities, but in fact you were synthetically trading storage, processing, transportation, etc. For a simple example, a position short the March contract and long the corresponding September contract gives you six months worth of storage (along with associated funding and insurance).
 
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tagoma
Posts: 18475
Joined: February 21st, 2010, 12:58 pm

Re: Commodities trading

February 16th, 2021, 5:06 pm

It is a job opening at Alpiq, right?
Anyways, I would add H.Geman Commodities and Commodity Derivatives: Modeling and Pricing for Agriculturals, Metals and Energy and related papers by this author to Track's reading list.
C.Alexander's Market Risk Analysis provides with some insights, too.
Bearish's comment above are wise as always.
Good luck!
 
jjv508
Topic Author
Posts: 3
Joined: February 5th, 2021, 6:23 pm

Re: Commodities trading

February 18th, 2021, 5:48 pm

@tagoma

Yes, indeed. Do you have any reference of the company ? :)
 
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tagoma
Posts: 18475
Joined: February 21st, 2010, 12:58 pm

Re: Commodities trading

February 19th, 2021, 3:40 pm

@tagoma

Yes, indeed. Do you have any reference of the company ? :)
Nope! I just came across their job ads a few time.
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