Professional Training

Real Options and Simulation in Energy Markets

2 days
2 days
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Course description

Real Options and Simulation in Energy markets is a two-day energy trading course presented by the energy training experts at Mennta Energy Solutions. This course is an advanced course for energy practitioners interested in enhancing their applied knowledge of best practices in valuation, hedging and risk management of long term contracts and physical assets. This highly interactive workshop uses practical case studies, Excel exercises and group discussions to reinforce the concepts presented in the lectures.

The course introduces the models and strategies used to value, hedge and manage the risk of derivatives and physical assets in leading energy trading organizations. Delegates learn about the practical applications of the models and strategies from the point of view of the users of those models, not the quantitative developers.

The course explores the embedded optionality and trading strategies to optimize storage, transportation (ground and marine) assets and long term contracts in gas, power and oil markets. Cross commodity spread strategies are explored in the context of power generation and oil refinery operations. The course also covers the valuation, hedging and optimization of natural gas, LNG and refined product storage strategies in contango and backwardated markets.

Delegates learn how to apply Monte Carlo simulation (stochastic forward curve models, Least-Squares Monte Carlo) and binomial/trinomial trees for physical asset valuation and hedging. Case studies show how to incorporate operational constraints in the analysis.

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
- Quantitative analysts
- Asset-based traders
- Commercial analytics teams
- Structured product teams
- Fundamental analysts
- Chief risk officers
- Middle office personnel
- Credit risk managers
- Risk consultants
- IT specialists


Day I

401: Valuation and Hedging of Physical assets and Long Term Contracts as real options

-    Types of real options:  volume, timing, cross-commodity and location
-    Differences between real options vs. standard options
-    Intrinsic vs. extrinsic value of real options
-    Optimization and re-optimization: Rolling intrinsic and spot-based trading
-    Position management and monetization Strategies
-    Risk-equivalent position mapping of real options

402: Energy Price Behaviour: Overview of forward curve models
-    Forward curve behavior in oil, gas and power markets
-    Review of spot price models: Geometric Brownian Motion (GBM), GBM with mean reversion and mean reverting jump diffusion (MRJD)
-    Multi-factor and multi-commodity models: Structured Monte Carlo (Cholesky-based) vs. Principal component analysis (PCA).
-    Excel exercises with PCA and structured Monte Carlo Simulation.
-    Case study: Forward curve simulation and risk measurement for swap portfolios
-    Seasonality and Forward Curve Simulations

403: Transportation and geographical spreads

-    Pipeline and Transportation Options
-    Understanding locational basis relationships in gas and power markets
-    Using basis swaps to fix prices; hedge transportation and transmission
-    Case Study: To flow or not to flow: Natural gas locational basis trading
-    Case Study: LNG trading and locational arbitrage
-    Firm capacity, Firm Recallable Capacity, and Interruptible services.
-    Congestion Revenue Rights (CRR) and Financial Transmission Rights (FTR)

404: Storage and Time Spreads

-    Natural Gas Storage: Time Spreads and Trading Strategies
-    Optimization in Contango and Backwardated markets
-    Intrinsic value calculation of Storage using Excel’s Solver
-    Extrinsic value calculation and strip of spread options
-    Park-and-Loan Services
-    Case study: LNG storage and optimal sendout plans
-    Case study: Storage hedging and operational risk

Day II

405: Power Generation and Refineries as a Real Option

-    Real options and production assets
-    Optionality in power generation
-    Spark Spreads and Heat Rate Forwards and Options
-    Closed-form solutions: Generation as a strip of spread options
-    Simulating the spark spread with 1-factor and 2-factor models
-    Earnings at Risk for a power plant under different hedging strategies
-    Refineries and crack spreads

406: Volumetric Risk and retail contracts

-    Swing and Gamma risk in retail contracts
-    Incorporating client demand strategies
-    Hedging retail contracts
-    Simulation of weather and valuation of weather derivatives
-    Case study: Pricing HDD and CDD options
-    Simulation of load and price and estimation of P/L distributions from retail contracts

407: Backwards induction methods and early exercise decisions
-    Dispatch rules and plant optimization
-    Introduction to Least-squares Monte Carlo
-    Case study: Pricing an American option with Longstaff-Schwartz method
-    Binomial and trinomial tress
-    Forest of trees and swing contracts
-    Case study: Swing contract valuation and hedging

408: Market, Credit and Operational Risk Policies and Metrics for Physical Assets

-    Market risk metrics for assets: VaR vs. other ‘at-risk’ metrics such as CFaR, GMaR and EaR
-    Case study: Gross earnings at risk for a power plant
-    Credit risk and exposure measurement: Potential future exposures (PFE)
-    Operational risk in assets
-    Case study: Introducing outages and pricing outage insurance in a simulation framework
-    Case study: Termination events and cancellation options in long term LNG contracts

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