lecture 3: price formation

Question 1

merit order

Answer 1

ranking of suppliers based on variable costs

Question 2

uniform price

Answer 2

MCP is the same for everyone

Question 3

contribution margin

Answer 3

MCP - variable costs

Question 4

influence supply on spot market

Answer 4

weather (direct = sunshine, wind, snow melt, water flow, indirect = cooling), unplanned outages, congestion in the grid, CO2 emission permits,

Question 5

influence demand on spot market

Answer 5

weather (temperature), seasonality (holidays, etc)

Question 6

forward contract

Answer 6

agreement to buy an underlying asset (e.g. commodity) at a given price at a time in the future

Question 7

futures contract

Answer 7

standardized (hence more liquid) forward contract

Question 8

physically long / short

Answer 8

net producer / net consumer

Question 9

financially long / short

Answer 9

buyer / seller of futures

Question 10

hedging

Answer 10

limiting the market risks (e.g. a producer sells a future)

Question 11

types of basis risks

Answer 11

product basis (future is not exactly the same as production or consumption), location basis, time basis

Question 12

forward curve

Answer 12

current price as a function of the time of the future contracts

Question 13

types of forward curves

Answer 13

contango (futures price > current spot market price)
backwardation (futures price < current spot market price)