Companies trading emission allowances face the challenge of determining the timing and volumes of their trades while balancing the cost of compliance against the risk of non-compliance. The key to success lies in devising a trading strategy that navigates various sources of risk in an optimal way - risks that arise from price volatility, uncertain volumes, margin calls, and regulatory changes.
Our emission allowance trading model offers carbon traders immediate decision support and empowers companies to calibrate an optimal trading strategy that maximizes rewards while accounting for the various sources of risk. By transitioning from human-based analytics to model-driven decision optimization, our model reduces the workload for traders and risk managers, offering an important building block towards decision automation.
What's inside the software?
- Calculate the optimal mix of futures and spot trading
- Trade-off futures premium against cost-of-capital
- Joint stochastic process of spot and futures prices
- Value-at-risk optimization
- Highly customizable model and interactive dashboard
- Rapidly deployed and securely hosted on AWS VPC
- Automate repeated optimization tasks
- Fully integrated in the QUASAR® Cloud platform
A detailed model of spot and futures trading
Quantego's model for emission allowance trading consists of a carbon price model and a decision model:
- The price model captures (a) the stochastic evolution of spot prices, (b) the random convenience yield that drives futures contract prices, and (c) limited liquidity of spot and futures products.
- The decision model (a) anticipates future portfolio rebalancing when new contracts become available, (b) accounts for changes in the market impact cost of trading in different products at different points in time, and (c) respects institutional order limits and hedge targets.
A ready-to-use graphical user interface
The model is available as ready-to-use yet highly customizable software solution deployed through QUASAR® Cloud.
Users can import and manage input data, execute optimization runs, inspect and analyze trading strategies, create interactive charts and reports, as well as export result data and easily share it across the organization. QUASAR® Cloud can be obtained as subscription service or set up on-premise via AWS VPC.
The world's most powerful stochastic programming solver
The model is driven by the powerful QUASAR® stochastic programming solver that combines the latest advancements in machine learning and mathematical optimization. QUASAR®’s highly efficient algorithms can solve the most complex stochastic-dynamic programming problems with hundreds of time stages, thousands of variables and millions of possible outcomes at an unprecedented speed.
A backtest using historical data of EUA spot and futures prices demonstrated that decisions based on Quantego's model for emission allowance trading in spot and futures markets results in significantly lower purchase costs compared to a 1/N strategy that is based on weekly spot purchases of anticipated allowance demand on the spot market.
What are the benefits?
Profitability increase and risk reduction
- Optimal timing of futures and spot trading
- Reduce transaction cost by trading when products are most liquid
- Diversify risk by spreading trading volumes across products and time
Risk management and compliance
- Follow best practices in portfolio optimization
- Detailed disclosure of hedging decisions
- Avoid error-prone and opaque spreadsheet calculations
Automated monitoring and reporting
- Trading recommendations and opportunity outlook
- Monitoring of company’s future exposure
- Value-at-risk and cashflow-at-risk for different hedging strategies
Hosted on QUASAR® Cloud
- Unify multiple models and its data on one platform
- Customizable model and reports
- Automate repeated optimization tasks
- Share model output as interactive reports across the organization
More Information and Resources
Check out our blog with more resources, such as white papers, customer success stories and academic publications.