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The Intermediate Derivatives Markets, Hedging, and Risk Management is a two-day class presented by the energy training experts at Mennta Energy Solutions. This is an intermediate course for professionals interested in improving their knowledge of energy derivatives hedging and risk management.
The course provides an overview of energy price behavior, and applied probability and statistics using Excel exercises with hands-on calculations. After introducing the building blocks of risk analysis, multiple exercises show how to calculate volatilities, correlations, Value at Risk and other risk metrics.
Delegates explore some of the main tools to manage and report market risk in energy portfolios such as VaR, Stress Tests and Backtesting. Various hands-on case studies show the step-by-step calculations for variance-covariance, Monte Carlo and Historical Simulation VaR for energy portfolios.
The course also covers derivatives instruments for basis risk management such as basis swaps and spread options and the use of correlation and regression to identify and measure basis risks. Case studies show to hedge in illiquid markets using proxy hedges.
The use of option strategies such as costless collars, 3-way collars, straddles and structured products is shown in an applied context, with emphasis on benefits and limitations in comparison to other hedging instruments.
The main option 'Greeks ' (Delta, Gamma, Vega and Theta) are also presented using practical exercises and main uses.
Please note: a laptop and up-to-date version of Office would be an advantage in order to engage in market data; however it is not essential.
201: Review of Energy Price Behavior, Probability and Statistics
- Overview of energy price behavior; seasonality; mean reversion; spikes
- Volatility structure in energy markets; spot vs. forwards
- Probability distributions; moments of a distribution, histograms and QQ plots.
- Excel exercises with hands-on calculations of volatilities, correlations
- Introduction to Monte Carlo simulation in Excel using normal distributions
- Case study: VaR calculation for a single exposure.
- Calculating and interpreting rolling window volatilities and correlations in Excel
202: Market Risk Management for Energy Trading (I)
- Best practices of market risk management in energy markets
- Market risk policies and procedures: Key components and effective oversight
- Case study: interpretation of market risk disclosures for large energy firm
- Understanding VaR and Expected tail loss (ETL)
- A simple way to calculate VaR: Top Down Approach
- Risk limits and risk reports
- Backtesting market risk models
- Oil, power and gas specific issues
203: Market Risk Management for Energy Trading (II)
- VaR methodologies
- Choice of confidence level and horizon
- Excel Case Studies for energy portfolios
- Analytic or Variance Covariance VaR.
- Review of Matrix Multiplication in Excel
- Monte Carlo Simulation
- Geometric Brownian Motion
- Simulating correlated market prices
- Comparative Analysis of VaR methodologies
204: Stress Testing and Backtesting for Energy and Commodity Firms
- Designing and conducting stress tests for energy portfolios
- Benefits of stress tests
- Standard & Poors liquidity risk survey and Stress Testing
- Integrating stress tests in the risk modeling process
- Reverse stress tests for energy portfolios
- Stress tests for crude and products; gas; electricity
- Exercise: Creating and presenting stress test reports
End of Day Summary
205. Analysis of Derivative Strategies
- Review of key option concepts.
- Zero-cost collars. Uses and misuses.
- Case Study: Using Zero Cost Collars in a Hedging Program
- Call and Put spreads. Main uses.
- Three-way Collars: Aggressive vs. Conservative strategies
- Volatility Plays: Straddles and Strangles
- Comparing the risk and benefits of various hedging strategies
206: Understanding option sensitivities through the "Greeks"
- Review of Black-76 and valuation of options
- Option Greeks: Definition, calculation and main uses
- Sensitivity vs. Price: Delta and Gamma
- Volatility exposure and Vega
- Theta and time decay.
- Case study: calculating and visualizing "Greeks" in Excel
- Delta hedging of option portfolios; key considerations
- Analyzing the dynamics of delta, gamma and vega for a straddle position
- Taylor series expansions and the use of Greeks to conduct P/L decomposition
- Case Study: Identifying price and volatility views using P/L decomposition
207: Basis Risk Management and Derivatives in Energy Markets
- Types of basis risk
- Managing basis risk with basis swaps
- Case study: Managing NYMEX/ICE basis risk with OTC basis swaps
- Hedging with futures and basis swaps
- Understanding and using correlation in valuation and risk measurement.
- Optimal hedge ratio: Calculations, uses and limitations
- Case study: Spread option valuation and Greeks
- IAS 39/IFRS 9 and Hedge Effectiveness. Ex-ante vs. Ex-post Tests.
- Managing basis risk with Exchange of Futures for Physical (EFP),
208: Integrated market risk management case study
- Market Risk metrics: Review of VaR methodologies.
- Excel case study: Comparative Analysis of VaR methodologies for sample portfolio
- VaR for option portfolios using simulation vs. delta-normal method
- Hedging and Risk calculations for portfolios with basis exposures with futures, swaps and basis swaps
- Best hedges and trade risk profiles