Real-Life Math
A lot of math goes on behind the scenes in the trading
department of a big energy company. Traders work with financial analysts to
find a sound market position that pays off big at the end of the day. They
are running to the phones every hour to change their positions or hold their
positions, hoping their calculations are going to be the right ones.
A
trader's success depends on their ability to conduct the technical research
and analysis necessary to understand where the market has been and where it
is going -- up or down?
"It is more than being comfortable with math,"
says Lucia Tomson, an energy trader. "There are analytics involved with large
quantities of data to develop trends and correlations, to name a few."
You
are a trader working with a financial analyst at the beginning of the day
to come up with a position. From your research, you know that the electricity
market has been rather bearish lately (which means it has been going down).
According
to today's news, a storm has knocked out power to 19 percent of the electrical
grid in Arizona. That 19 percent holds 40 percent of the state power. The
value of the electricity that remains on the market goes up by 9 percent.
The market value of electricity before the storm, when grids were at 100 percent,
was $60 per megawatt.
You want to sell your electricity for $70 or
higher per megawatt because that will give you a profit of $10 per megawatt.
Based on your research and knowledge of the electricity market (as well as
some intuition), you believe that the price of electricity will go up another
10 percent on top of the amount it has already gone up.
You're
right! The price of the electricity goes up another 10 percent. Is the price
now high enough for you to sell?