Introduction to Applied Probability for Energy Risk Management
There are many instances where those involved in energy products must make decisions under conditions of uncertainty. An oil producer must decide how much inventory to stock; a risk manger how much economic capital to set aside, and an electricity speculator when to buy or sell. In each of these cases the individuals make their decision on the basis of what they think is likely to occur; their decision is based on the probability that certain events will or will not happen. Most of us have some intuitive understanding of probability. Some people prefer to take the train to their place of work in the knowledge that a serious accident is less likely than if they drive. Others participate in high risk sports such as boxing or sailing, knowing that they are likely to face serious injury or death, but then again the likelihood of such extreme outcomes is actually quite small. Millions of individuals purchase lottery tickets even though the likelihood of wining a very large pay-out is extremely small. If we say that the probability of snow today is one-half, but tomorrow it is only one quarter, we know that snow is more likely today than tomorrow.
KeywordsProbability Density Function Future Price Probability Mass Function Spot Price Discrete Random Variable
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