1. Rene A. Carmona Bendheim Center for Finance Department of Operations Research & Financial Engineering Princeton University Portfolio Risk in the Electricity Markets

2. Traditional Role of the Financial Engineer New Instrument Valuation Take-or-pay, swing option, weather derivatives, gas storage,…. Design and analysis of risk measures VaR, Expected Shortfall, ….. Coherent measures of risk Search for optimal hedging strategies VaR hedging, Delta hedging, Delta-Gamma hedging, …. Incomplete markets Stochastic volatility, jump diffusions, ….. Dynamic hedging for buyers and sellers Indifference pricing

3. FE for the New Power Markets Credit Rating Free-Fall Could Clearing be a Solution ? Benchmark for Collateral Posting

4. Credit Rating Downgrades Modeling illiquidity Understanding credit migration Including counterparty risk in valuation Hedging with credit derivatives

5. Could Clearing be a Solution? Need for standardized instruments Exchange traded instruments are standardized OTC are not Design of a minimal set of instruments from which most instruments could be synthesized Industry loves tailor made contracts

6. Collateral Requirements / Margin Calls Frequent Marks to Market Objective valuation algorithms widely accepted Netting or not Netting (that is the question) Challenge of the quantification of dependencies Correlations, copulas, ….. Integrated approach to risk control Distributed optimization

7. Conclusions Think Probabilistically Estimate Properly the Distribution Tails Use the Right Tools to Quantify Dependencies

8. Operations Research & Financial Engineering Princeton University Bendheim Center for Finance