Course description
The Intermediate Derivatives Markets, Hedging, and Risk Management is a two-day class presented by the energy training experts at Mennta Energy Solutions. The course also 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, we estimate volatilities, correlations and calculate Value at Risk and other risk metrics.
Delegates explore some of the main tools to manage market risk in energy portfolios, with particular emphasis on VaR, Stress Tests and Backtesting. Delegates conduct hands-on calculations for variance-covariance, Monte Carlo and Historical Simulation VaR for energy portfolios.
The course covers advanced instruments for basis risk management such as basis swaps and 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, exotic options and structured products is shown in an applied context, with emphasis on pros and cons vs. other hedging instruments.
A new module covers how to perform Profit and Loss Attribution for Linear and Non-Linear Derivatives, includes several case studies. The main option “Greeks’ (Delta, Gamma, Vega and Theta) are presented using practical exercises.
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.
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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
Content
Day I:
Course Introduction
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
- 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
- Understanding VaR and Expected tail loss (ETL)
- A simple way to calculate VaR: Top Down Approach
- Case study: interpretation of market risk disclosures for large energy firm
- Risk limits and risk reports
- Backtesting market risk models
- Oil, power and gas specific issues
Lunch Break
203: Market Risk Management for Energy Trading (II)
- VaR methodologies
- Excel Case Studies
- Analytic or Variance Covariance VaR.
- Review of Matrix Multiplication in Excel
- Monte Carlo Simulation
- Geometric Brownian Motion
- Simulating correlated market prices
- Historical simulation
- How to Game VaR
- Overcoming known problems with VaR models
Coffee Break
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
- Stress tests for crude and products; gas; electricity
- Exercise: Creating and presenting stress test reports
End of Day Summary
Day 2
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 Programme
- 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
Coffee Break
206: Understanding option sensitivities through the "Greeks"
- Review of Black-76 and valuation of options
- Delta and Gamma, Vega and Theta: Definition, calculation and main uses.
- Case study: calculating and visualizing "Greeks" in Excel
- Delta hedging of option portfolios; key considerations.
- Delta-gamma hedging and Delta-gamma-vega hedging
- Analyzing the dynamics of delta, gamma and vega for a straddle position
Lunch Break
207: Profit and Loss Attribution for Linear and Non-Linear Derivatives (NEW)
- P&L decomposition and attribution for linear and non-linear books
- Case study: P/L decomposition for physical books
- Taylor series expansions and the use of Greeks to conduct P/L decomposition
- Case Study: Identifying price and volatility views using P/L decomposition
- Deconstructing Risk: Marginal VaR
- Explaining VaR changes with a risk attribution report
Coffee Break
208: 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.
- Pitfalls of correlation as a measure of dependence
- Short-term correlation vs. long term co-movement (cointegration)
- IAS 39/IFRS 9 and Hedge Effectiveness. Ex-ante vs. Ex-post Tests.
- Minimum Variance Ratio using Volatility and Correlation Analysis
Course Wrap-up