Professional Training

Introduction to Derivatives Markets, Hedging and Risk Management

2 days
2 days
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Course description

Introduction to Derivatives Markets, Hedging, and Risk Management is a two-day instructor-led program presented by the energy training experts at Mennta Energy Solutions. This energy training course provides an overview of energy derivatives and physical markets as well as the main instruments traded by the main market participants.

The course explores physical and paper transactions as well as the pros and cons of commonly used exchange-traded and OTC products. Delegates learn how to mitigate market risk of energy exposures using futures, forwards and swaps with multiple case studies.  The course will also provide an overview of option contracts and hedging strategies using options and simple structures.

This applied course also covers strategic and tactical issues for alternative hedging strategies used by producers and end-users. Practical case studies show how to evaluate hedge strategies under different risk dimensions in the context of achieving business goals.

Delegates also learn best practices for oversight of derivatives activities, the trade lifecycle and valuation and hedge accounting of energy derivatives.

The topics covered can assist delegates preparing for GARP’s Energy Risk Professional (ERP) exam.

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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  • 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


Day 1

101: Overview of Energy Physical and Financial Markets

-    Overview of energy markets, risks and players
-    Why are energy markets different?
-    Case study: Risk dimensions in energy markets: Market, Credit, Liquidity, Operational, Model, Volumetric
-    Risk tolerance, appetite and forward-looking risk metrics to measure and manage risk
-    Trading mechanisms: Exchange-based and OTC trading (Billateral, OTC Clearing)
-    Long and Short: Volumetric vs. Price Exposures
-    Physical vs. Financial settlements
-    Entering into a futures position: Market, limit and Trade at Settlement (TAS) orders (NEW)
-    Entering and exiting financial hedges: Bilateral Trading vs. Exchanges

102: Spot Prices and Forward Curves in Energy Markets

-    Spot (Cash) Prices: Main Characteristics
-    Forward Price Curves: Contango and backwardation
-    What does the forward curve tell us?
-    Building Forward Curves for Mark-to-market and Risk Analysis
-    Forward curves vs. Price Forecasts (NEW)
-    Arbitrage relations and forward curves
-    Case study: Arbitrage in Contango and Backwardated Markets
-    Price Volatility in Energy Markets. Introduction to historical and implied volatility.

103: Hedging with Physical Forwards and Futures

-    Fixed price vs. Index physical forward contracts
-    Case Study: Hedging physical purchases and sales with fixed price forwards
-    Introduction to futures contracts
-    Hedging with Futures: Main considerations
-    The Mark-to-market Process. Clearing, collateral and margin issues
-    Case Study: Mark-to-Market and Margin calculations for a futures contract
-    Case study: Hedging fixed price and floating price deals with strips of futures contracts
-    Excel case study: Creating a payoff diagram for linear hedge instruments with Data tables.
-    Main derivatives regulations and impact on clearing

104: Hedging with Swaps and Futures

-    Fixed for Floating Swaps: Key contract components
-    Differences between futures and swaps
-    Case study: Hedging Bunker fuel purchases with swaps
-    Hedging a cargo purchase with swaps and futures.
-    Unwinding a futures hedge to match average pricing in physical contracts (NEW)
-    Comparative analysis of hedging with forwards, futures and swaps
-    Exchange of futures for physical (EFP) and Exchange of future for swaps (EFS): Main uses and step-by-step examples

End of Day Summary

Day 2

105: Using Energy Options: Hedging and Speculation

-    Review of options types: Calls, Puts
-    Buying and Selling Options: Understanding option payoffs
-    Why use options?
-    Intrinsic and extrinsic value of an option
-    What are the main drivers of option premiums?
-    Setting revenue floors and cost ceilings (caps) with options
-    Individual options vs. Strips of Options: Examples
-    Case Study: Hedging against price spikes with options
-    Selling options: Covered and Naked positions (NEW)

106: Strategic and Tactical Issues around Hedging with Energy Derivatives

-    Best practices in designing and effective hedging program (NEW)
-    Understanding operations and entity-wide objectives.
-    Evaluating the impact of inaction vs. hedging. Payoffs under different scenarios.
-    Case Study: Analysis of main hedging strategies used by airlines
-    The role of risk and regret in designing and evaluating hedging strategies
-    Hedging alternatives and Key Risk Indicators (KRIs)
-    Case study: KRIs and trade-offs from alternative hedge strategies

107: Trading Strategy and Technical Analysis

-    Market Psychology and Technical Analysis
-    Line Charts, Bar, and Candlestick Charts
-    Identifying Trends, Support, Resistance
-    Commonly used indicators: Moving Averages, MACDs, RSIs, Bollinger Bands
-    Backtesting Trading Models
-    Commitment of Trader Reports: Hedgers, Money Managers and Market Makers (NEW)
-    Integrating Fundamental and Technical Analysis
-    Case study: Using Fundamentals, Technicals and Algorithmic Trading in different market environments
-    Elements of a Trading Strategy

108: Introduction to Derivatives Oversight, Valuation and Disclosures:

-    Best practices in derivatives oversight: Risk policies and procedures (NEW)
-    Introduction to Fair Value: Mark-to-model vs. Mark to Market
-    Data sources for forward curves. Pros and cons of alternative sources.
-    Valuation of forward contracts and swaps using forward curves in Excel
-    Valuation of Options using Black-76. Introduction to implied volatility and skews
-    Hedging Policy and Derivatives Use Disclosures: Liquidity Levels
-    Hedge effectiveness and accounting issues (IAS 39 and IFRS 9)
-    Credit valuation adjustments (CVA)

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