Advanced Energy Derivatives Pricing, Hedging and Risk Management

Advanced Energy Derivatives Pricing, Hedging and Risk Management (DPH3) builds on the concepts and instruments presented in Energy Derivatives Markets, Instruments and Hedging (DPH1) and Energy Derivatives Pricing, Hedging and Risk Management (DPH2) and covers advanced derivatives pricing topics as well as market risk management of derivatives portfolios. Advanced market risk management topics such as applications of marginal VaR analysis, backtesting VaR models and extreme value theory VaR are presented. Counterparty risk management and potential future exposure (PFE) calculations are covered in this module. Advanced derivatives pricing and hedging concepts covering exotic derivatives and physical assets (eg power plants and natural gas storage) are also presented in this course. The course also covers advanced hedging concepts such as delta-gamma hedging and cross-market hedging and hedging in the presence of volumetric risk.

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.

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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

Not sure if you have the appropriate experience? Click here to test yourself on the knowledge necessary for this course.

Review of DPH1 and DPH2

• Spot, basis and forward prices in energy markets
• Overview of derivatives contracts in energy markets
• Spot and basis price models: GBM, mean reversion, jumps
• Simulation of spot price models in Excel and visualization of price paths
• Mark to market and pricing models; FAS 157
• Market risk management: VaR, stress tests

Advanced Hedging

• Using "proxies" for hedging analysis; review of regression analysis applied to hedging
• Using a single vs. multiple proxy hedges
• Examples of basis hedging in natural gas markets
• Delta hedging of option portfolios; key considerations.
• Delta-gamma hedging
• Delta-gamma-vega hedging
• Cross-hedging and cross-market Greeks; spark spreads; crack spreads

Energy Price Behaviour (II): Overview of Forward Curve Models

• Forward curve behavior
• Analysis of WTI forward curve; explaining Contango and Backwardation changes
• One factor models of the forward curve: uses and limitations
• Multi-factor and multi-commodity models
• Multi-factor models (Cholesky-based) and principal component analysis (PCA); Uses and pitfalls
• Excel exercises of PCA and structured Monte Carlo simulation; VaR and valuation calculations of energy derivatives

Valuation and Hedging of Physical Assets and Long Term Contracts as Real Options

• Typology of spread and multi-asset options (spread, best-of, worst-of, compound, baskets)
• Incorporating operational constraints in the valuation
• Natural gas transportation as a locational spread
• Generation assets as strips of spark-spreads
• Refineries as real options
• Natural gas storage as a basket of calendar spreads
• LNG trading and locational spread and timing options
• Case study

Advanced Market Risk Management for Energy Trading

• Introducing volatilities as risk factors
• Advanced historical simulation: EWMA HS and volatility-updated HS
• Marginal VaR analysis: applications for hedging and risk management
• Backtesting VaR models: frequency and magnitude of losses
• Tail "heaviness" and tail "asymmetry"; expected tail loss and other risk measures
• Extreme value theory VaR and ETL:
  • Integrating stress tests into the tail analysis
  • Key insights from behavioral finance regarding misperception of extreme risk probabilities
• Case study: diagnosis and recommendations for model improvements based on backtest results

Dynamic Simulation of Risk

• Dynamic simulation of portfolios responding to changing market conditions
• Earnings at risk and cash flow at risk for multiple maturities
• Margin-at-risk calculation and liquidity risk management
• Risk measures with dynamic hedging, stop loss, and optimal liquidation rules
• Evolution of prices, volatilities and correlations in a dynamic simulation framework
• Case study: integrating liquidity risk into stress tests

Counterparty Risk Management

• Potential counterparty exposure for energy derivatives
• Counterparty risk trading in energy trading
• Expected vs. potential future exposure
• Potential exposure and the role of margin, collateral and settlements
• Calculating PFE in Excel
• Potential future exposure using analytical solutions and simulation
• Step by step calculations and interpretation for forwards, swaps and options
• Impact of mean reversion and jumps in potential future exposure calculations
• Counterparty VaR and dynamic potential exposure
• Adding default probabilities for different time frames
• Using potential credit exposure to determine limits

Advanced Derivatives and Physical Asset Valuation and Hedging

• Valuation and hedging of exposures with volumetric risk
• Modeling load as a function of weather
• Ruthless vs. non-ruthless exercise; incorporating "expected" exercise strategies
• Modeling full-requirement deals
• Incorporating plant outages and pipeline "blow-ups" in the simulation framework
• Stochastic volatility models
• Forest of trees and valuation of swing contracts and storage assets
• Least squares Monte Carlo simulation: pricing American and co-dependent options in a simulation framework

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.

Testimonials

“Great course which did a good job of explaining advanced and complex topics into easy to understand terms. Would recommend Oxford Princeton to colleagues.” M.B., Terasen Gas

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