Advanced Energy Derivatives Pricing, Hedging and Risk Management

Advanced Energy Derivatives Pricing, Hedging and Risk Management

Course Summary
Advanced Energy Derivatives Pricing, Hedging and Risk Management(DPH3) builds on the concepts and instruments presented inEnergy Derivatives Markets, Instruments and Hedging(DPH1)andEnergy Derivatives Pricing, Hedging and Risk Management(DPH2)and covers advanced derivatives pricing topics as well as market risk management of derivatives portfolios. Advanced market risk management topics such as applications of marginal VaR analysis, backtesting VaR models and extreme value theory VaR are presented. Counterparty risk management and potential future exposure (PFE) calculations are covered in this module. Advanced derivatives pricing and hedging concepts covering exotic derivatives and physical assets (eg power plants and natural gas storage) are also presented in this course. The course also covers advanced hedging concepts such as delta-gamma hedging and cross-market hedging and hedging in the presence of volumetric risk.

This highly interactive workshop uses practical case studies, Excel exercises and group discussions to reinforce the concepts presented in the lectures.
Please note: a laptop and up-to-date version of Excel software is required in order to engage in market data.
8CPE creditsper training day awarded for this course.

Suitability:

• Market risk managers
  
• Energy traders
  
• Trading managers
  
• End-users of derivatives in corporations
  
• Credit risk analysts
  
• Risk consultants
  
• Risk and audit committee members
  
• CFOs and treasury managers
  
• Finance department personnel
  
• Compliance managers
  
• Middle and back-office personnel
  
• Treasurers and treasury analysts
  
• Chief risk officers
  

Energy Price Behaviour: Overvie- of Forward Curve Models

• Forward curve behavior
  
• Analysis of WTI forward curve. Explaining contango and backwardation changes
  
• One factor models of the forward curve
  
• Multi-factor and multi-commodity models
  
• Multi-factor models (Cholesky-based) and principal component analysis (PCA). Uses and pitfalls.
  
• Excel exercises of PCA and structured Monte Carlo simulation. VaR and valuation calculations.
  

Advanced Hedging

• Delta hedging of option portfolios. Key considerations.
  
• Delta-gamma hedging
  
• Delta-gamma-vega hedging
  
• Cross-hedging and cross-market Greeks. Spark spreads. Crack spreads.
  
• Valuation and hedging of exposures with volumetric risk
  
• Understanding volumetric risk.
  
• Modeling load as a function of weather.
  
• Ruthless vs. non-ruthless exercise. Incorporating “expected” exercise strategies.
  
• Modeling full-requirement deals.
  
• Incorporating plant outages and pipeline “blow-ups” in the simulation framework
  

Advanced Derivatives Pricing

• Implied volatility calculations
  
• Implied volatility skews and surfaces in energy markets
  
• Case study: Bank of Montreal energy derivatives fiasco
  
• Stochastic volatility models
  
• Forest of trees and valuation of swing contracts and storage assets
  
• Least Squares Monte Carlo simulation: Pricing American and co-dependent options in a simulation framework
  

Advanced Market Risk Management for Energy Trading

• Marginal VaR analysis: applications
  
• Backtesting VaR models: frequency and magnitude of losses
  
• Expected tail loss and other coherent risk measures.
  
• Non-normal distributions and extreme risks
  
• Extreme value theory VaR and ETL: Excel calculations
  
• Tail “heaviness” and tail “asymmetry” risk measures
  
• Integrating stress tests into the tail analysis
  
• Key insights from behavioral finance regarding misperception of extreme risk probabilities
  
• Case study: Diagnosis and recommendations for model improvements based on backtest results
  

Dynamic Simulation of risk

• Dynamic simulation of portfolios responding to changing market conditions.
  
• Earnings at risk and cash flo- at risk for multiple maturities
  
• Risk measures with dynamic hedging, stop loss, and optimal liquidation rules.
  
• Evolution of prices, volatilities and correlations in a dynamic simulation framework
  
• Case study: Integrating liquidity risk into stress tests
  Counterparty Risk Management
  

Potential Counterparty Exposure for Energy Derivatives

• Counterparty risk trading in energy trading
  
• Expected vs. potential future exposure
  
• Potential exposure and the role of margin, collateral and settlements
  
• Calculating PFE in Excel
  
• Potential future exposure using analytical solutions and simulation
  
• Step by step calculations and interpretation for forwards, swaps and options
  
• Impact of mean reversion and jumps in potential future exposure calculations
  
• Counterparty VaR and dynamic potential exposure
  
• Adding default probabilities for different time frames
  
• Using potential credit exposure to determine limits
  

Valuation and Hedging of Physical assets and Long Term Contracts as real options

• Typology of spread and multi-asset options (spread, best-of, worst-of, compound, baskets).
  
• Incorporating operational constraints in the valuation
  
• Natural gas transportation as a locational spread
  
• Generation assets as strips of spark-spreads
  
• Refineries as real options.
  
• Natural gas storage as a basket of calendar spreads