The table below provides the price history for the 3 different price points.
- NBP spot prices : Spot Natural Gas Price in UK.
- TTF spot prices : Spot Natural Gas Price in Netherlands.
- ZTP spot prices.: Spot Natural Gas Price in Belgium.
These three countries in Europe have interconnected pipelines as follows :
UK - Netherlands : Bacton bbl : virtual bi-directional flow
UK - Belgium : Bacton Interconnector : physical bi-directional
Using the above daily price stream, we calculate daily returns. We use 5 day equally weighted moving returns to calculate daily volatility and mean for each gasday.
A graph of the 5 day moving average volatility is shown below for each supply hub.
As seen above , TTF and ZTP vols follow each other very closely.Spot NBP jumps to around 3.9% volatility and then moves gradually back to 2% volatility and below .
we will use the volatility data to calculate one day VaR ( Value at Risk). Value at Risk in short tells us what is the probability of loss or profit for a given time frame with a given level of confidence.
Since we are using one day volatility, we would calculating one day VaR with 99% confidence interval.(meaning that there is 99% probability of an upside or loss).
if the underlying distribution were standard normal ( mean = 0, vol=1), than the formula would be :
but however our underlying is not standard normal.
we are using an Analytical formula to come up with the VaR figure. The Analytical approximation is
As you see, the volatility and mean of the distribution changes each day and hence the VaR too.
The graph below charts the daily VaR movement.
How do we read the graph or the table.
say for example on 2/26/2015 with 99% confidence, depending on whether we were short or long.
- NBP portfolio component would have gained or lost 6% of its value
- TTF portfolio component would have lost or gained by 4% in value
- ZTP portfolio component would have lost or gained by 5% in value
here the correlation between all the three instruments is taken as zero. ( random, no correlation) since each instrument is considered individually.