Intermediate Derivatives Markets, Hedging and Risk Management (VIRTUAL) - DPH2V

Intermediate Derivatives Markets, Hedging and Risk Management (VIRTUAL) - DPH2V

Course Summary

This virtual instructor-led 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. It is an intermediate course for professionals interested in improving their knowledge of energy derivatives hedging and risk management.

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.

Recommended prior course: DPH1, DPH1V or basic knowledge of energy markets, futures, swaps, forwards and options.  Please note: an up-to-date version of Microsoft Excel is required in order to engage in market data.

Course Content

Energy Price Behavior, Probability and Statistics

• Overview of energy price behavior; seasonality; mean reversion; spikes
• 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

Market Risk Management for Energy Trading

• Understanding VaR and Expected tail loss (ETL)
• VaR methodologies: Top Down vs. Bottom Up
• 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
  • Historical simulation
• Excel case study: Comparative Analysis of VaR methodologies for sample portfolio

Stress Testing and Backtesting for Energy and Commodity Firms

• Integrating stress tests in the risk modeling process
• Reverse stress tests for energy portfolios
• Standard & Poors liquidity risk survey and Stress Testing
• Stress tests for crude and products; gas; electricity
• Exercise: Creating and presenting stress test reports
• Backtesting market risk models

Basis Risk Management and Derivatives in Energy Markets

• Hedging with futures and basis swaps
• Examples using natural gas and power markets
• Understanding and using correlation in valuation and risk measurement.
• Introduction to spread options and main uses
• Optimal hedge ratio: Calculations, uses and limitations
• Case study: Practical uses of spread options
• IAS 39/IFRS 9 and Hedge Effectiveness

Analysis of Derivative Strategies

• 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
• Exercise: Trading instrument selection under different market and volatility views
• Exercise: Comparing the risk and benefits of various hedging strategies

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