Energy Derivatives Markets, Instruments and Hedging

This 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 and also between exchange-traded and OTC products. We will show how to trade and understand the risk 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. We will cover strategic and tactical issues around hedging with Energy Derivatives and will explore alternative hedging alternatives for producers and end-users. The course will introduce exotic options, as well as options on spreads and multiple assets and the use of those options in hedging programmes.

This highly interactive workshop uses practical case studies, Excel exercises and group discussions to reinforce the concepts presented in the lectures.

Please note: a laptop and up-to-date version of Excel software is required in order to engage in market data.

8 CPE credits per training day awarded for this course.

Do you have a question or enquiry regarding this course?

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Asia Pacific Europe, Middle East, Africa, Central & South America North America

• 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

Overview of Energy Physical and Financial Markets

• Overview of energy markets, risks and players
• Why are energy markets different?
• Risk dimensions in energy markets: price, basis, volume, regulation, weather, operations.
• Exchange-based and OTC trading
• Impact of physical delivery
• Main energy organized exchanges
• The mark-to-market process
• Clearing, collateral and margin issues
• Case study: Energy Trading in Nymex Clearport and ICE

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: Analysis of the Backwardation Index for WTI
• Arbitrage relations and forward curves
• Case study: Brent vs. WTI differential drivers
• Impact of storability and transportation
• Building forward curves in illiquid markets
• Case study: building forward curves for mark-to-market and risk analysis

Using Energy Futures, Forwards, Swaps

• Energy forward and futures contracts
• Linear vs. non-linear payoffs
• Hedging with futures. buyers and sellers. long or short?
• Hedging with forward and swaps
• Index swaps and fixed for floating swaps
• Exchange for Physical (EFP) and Exchange for Swaps (EFS)
• Valuation of forward contracts and swaps in Excel

Using Energy Options: Hedging and Speculation

• Review of options types: calls, puts
• Buying and selling options: understanding option payoffs
• Why use options?
• What are the main drivers of option premiums?
• Individual options vs. strips of options: examples
• Options on forwards and options on swaps (swaptions)
• Case study: Using exotic swaps with embedded options for hedging (and speculation)

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.
• Avoiding 'suitability risk'. Evaluating the use of derivatives to control market risk and linking-use to entity-wide and activity-level objectives.
• Defining risk management activities and terms.
• Assessing the appropriateness of specified activities and strategies relating to the use of derivatives
• Dealing with ‘Monday-morning quarterbacks”: Establishing procedures for obtaining, monitoring and communicating risk management activities and their results.
• Case study: Hedging alternatives for an oil producer

Exotic Options

• Average price (Asian) options
• Barrier options: knock-outs and kick-ins
• Digital (binary) options
• Compound options
• Case study: Uses and misuses of exotic options in hedging programmes

Options on Multiple Assets

• Drivers of premiums on options with more than one underlying
• Spread options: Case study: Options on the spark spread
• Basket options: Case study: Options on crack spreads
• Best-of options: Case study: Pipeline transportation with multiple locations
• Swaptions: swaps as baskets of forward contracts

Strategies with Options

• Behavior of spreads under extreme market conditions. Case study: Hurricane Katrina and fuel price behavior in key pricing regions in the United States.
• Case study: Hedging refinery margins with a crack spread swap. Illustration and revenue payoff before and after hedging.
• Case study: Jet fuel hedging strategies by airlines.

Faculty

DR CARLOS BLANCO is an expert in energy, commodity, and financial risk management and modeling. He has been a faculty member of the Oxford Princeton Programme since 2004, where he teaches the Derivatives Pricing Hedging and Risk Management Certificate Programme as well as courses on Counterparty Risk Management and Gas and Power Trading and Risk Management.

He has published over 100 articles on financial, energy, and commodity trading, hedging and risk management. He is the founder and managing director of a risk management advisory firm with clients in North America, Europe, Africa and Asia. Carlos is a former VP, Risk Solutions at Financial Engineering Associates. There, he worked over six years as an essential contributor in the development of the energy derivatives valuation and risk management models of the firm. He also provided leading-edge risk advisory and educational services to over 500 energy and commodity trading firms and financial institutions worldwide. He also managed the world-class support and professional services department within the firm. Prior to FEA, Carlos worked for a hedge fund in the Midwest and an asset management firm in Madrid, Spain. He is a former regional director of the Professional Risk Managers’ International Association (PRMIA).

Testimonials

“This was an excellent course that helped me to understand a lot of the questions I had about derivatives and the energy industry.” W.W., Mentat Solutions

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