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Introduction to Derivatives Markets, Hedging and Risk Management

Length
2 days
Length
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 in those markets. We will explore the main differences between physical and paper transactions as well as the pros and cons of exchange-traded vs. OTC products. We will show delegates how to trade and understand the use of futures, forwards and swaps to mitigate market risk. The course will also provide an overview of option contracts and hedging and speculation strategies using options and simple structures. This applied course will also cover strategic and tactical issues for alternative hedging strategies used by producers and end-users. We also review the relevant accounting rules for valuation and hedge accounting such as IAS 39/IFRS9.

The topics covered in DPH1 and DPH2 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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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 1

101: Overview of Energy Physical and Financial Markets

  • Overview of energy markets, risks and players
  • Why are energy markets different?
  • Risk dimensions in energy markets: Market, Credit, Liquidity, Operational, Model, Volumetric
  • Introduction to forward looking risk metrics to measure and manage risk
  • Trading mechanisms: Exchange-based and OTC trading (Billateral, OTC Clearing)
  • Physical vs. Financial settlements
  • Entering and exiting a hedge positions: Billateral 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?
  • Case Study: Building Forward Curves for Mark-to-market and Risk Analysis
  • Analysis of the Backwardation Index for Crude Oil
  • 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
  • Hedging with Futures and Strips of Futures.
  • The Mark-to-market Process. Clearing, collateral and margin issues
  • Case Study: Mark-to-Market and Margin calculations for a futures contract
  • Excel case study: Hedging 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. How to unwind the hedge.
  • Comparative analysis of hedging with forwards, futures and swaps
  • Exchange for Physical (EFP) and Exchange for Swaps (EFS)

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

106: Strategic and Tactical Issues around Hedging with Energy Derivatives

  • Designing and Effective Hedging Program
  • Understanding operations and entity-wide objectives.
  • Evaluating the impact of inaction vs. hedging. Payoffs under different scenarios.
  • Case Study: Hedging Strategy by Airlines
  • Hedging alternatives and Key Risk Indicators (KRIs)
  • The role of risk and regret in designing and evaluating hedging strategies
  • 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
  • Moving Averages, Oscillators, Divergence and Convergence Indicators
  • Integrating Fundamental and Technical Analysis
  • Backtesting Trading Models
  • Elements of a Trading Strategy
  • Case study: Risk-based hedging vs. programmatic hedging

108: Introduction to Derivatives Valuation and Disclosures:

  • 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
  • Liquidity Levels
  • Hedging Policy and Derivatives Use Disclosures
  • Hedge effectiveness and accounting issues (IAS 39 and IFRS 9)
  • Credit valuation adjustments (CVA)

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