Course Summary

Energy Derivatives Pricing, Hedging and Risk Management (DPH2) builds on the concepts and instruments presented in Energy Derivatives Markets, Instruments and Hedging (DPH1) and provides an overview of Energy derivatives Pricing and Risk Management.

We will start with a review of Energy Price Behavior, Probability and Statistics and various Excel exercises with hands-on calculations of various risk statistics. As a review and extension of some of the structures presented in DPH1, a common framework to analyze derivatives structures and long term contracts is also presented.

The course also covers an introduction to derivatives pricing models and relevant accounting rules such as FAS 157. Implied volatility and "Greeks" are presented using practical exercises. The course also covers analysis of structured products used by producers and end-users such as extendable swaps; spot price models, geometric brownian motion and mean-reverting models for pricing and risk analysis; market risk with particular emphasis on VaR; basis risk and derivatives in energy markets with an overview of hedge effectiveness under FAS 133. The course concludes with an overview of stress testing for energy derivatives portfolios.

Please note: a laptop and up-to-date version of Microsoft Excel software is required in order to engage in market data (Excel 2003 or above).

8 CPE credits per training day awarded for this course.

Who Should Attend?

• 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.

Course Contents

Review of Energy Price Behavior, Probability and Statistics

• Overview of energy price behavior; seasonality; mean reversion; spikes
• Spot vs. forward prices; price indices and market liquidity
• Building forward curves in illiquid energy markets
• Volatility structure in energy markets; spot vs. forwards
• Probability distributions; moments of a distribution.
• Calculating volatility and correlation.
• Excel exercises with hands-on calculations of various risk statistics

Energy Derivatives Structures

• How to unbundle embedded risk structures in energy contracts
• Building blocks: long vs. short; option types; volumes; strike price; exercise style; underlying; trigger event/contingency; payoff type
• Review of main derivatives structures: futures and forwards; fixed for floating and basis swaps; European and American options; basis swaps and options; exotic options
• Overview of swing contracts

Mark-to-Market vs. Mark-to-Model: Introduction to Derivatives Pricing Models: Conceptual Interpretation. Uses. Pros and Cons

• Mark-to-market vs. mark-to-model. Conceptual interpretation.
• Overview of FAS 157 and three 'fair value' levels. Adding the liquidity dimension Closed-form solutions (formulas). Case study: Pricing an option using Black 76 in Excel.
• Monte Carlo simulation based models. Case study: Generating random paths in Excel.
• Binomial and trinomial trees. Case study: Pricing an American option.
• Understanding option sensitivities through the "Greeks" Case study: calculating and visualizing "Greeks" in Excel

Analysis of Derivative Strategies

• Zero-cost collars
• Three-way collars
• Bull and bear spreads
• Volatility plays: straddles and strangles
• Exotic swaps: extendable, cancelable, double-up swaps

Energy Price Behaviour: Overview of spot price models

• Spot price models for energy and commodity markets
• Understanding price processes; parameterization
• Geometric Brownian motion; uses and limitations
• Mean reversion; limit of variance ("terminal distribution"). Case study: Simulating a mean-reverting process in Excel.
• Jump diffusion and mean reverting with jumps price processes

Market Risk Management for Energy Trading

• Market risk and "risk factors"
• Understanding VaR and expected tail loss (ETL)
• Overview of methodologies: analytic, Monte Carlo and historical simulation
• Case study: interpretation of market risk disclosures for large energy firm
• Oil, power, coal and gas specific issues
• Case study: calculating VaR in a spreadsheet

Basis Risk and Derivatives in Energy Markets

• Understanding correlation. Seasonality considerations.
• FAS 133 and hedge effectiveness. ex-ante vs. ex-post tests
• Case study: Hedging strategy by airlines
• Minimum variance ratio using volatility and correlation analysis
• Correlations between spot and forward contracts
• Pitfalls of correlation as a measure of dependence
• Case study: natural gas location basis risk

Stress Testing and Backtesting for Energy and Commodity Firms

• Designing and conducting stress tests
• Benefits of stress tests
• Standard & Poors liquidity risk survey and stress testing
• Integrating stress tests in the risk modeling process
• Stress tests for crude and products; gas; electricity
• Exercise: Stress tests and technical risk reviews

Certificate in Derivatives Pricing, Hedging and Risk Management The course described on this page is a module within the Certificate in Derivatives Pricing, Hedging and Risk Management. Candidates for this certification program need to successfully complete three courses in this order: Energy Derivatives Markets, Instruments and Hedging (DPH1) Energy Derivatives Pricing, Hedging and Risk Management (DPH2) Advanced Energy Derivatives Pricing, Hedging and Risk Management (DPH3) Candidates have three (3) years to complete all three courses as well as accompanying exams. Each course is offered at least once a year. Once a course is completed, an exam paper will be mailed to the candidate and must be completed and submitted within three (3) months. A brief paper is to be completed at the end of the final course that will enable candidates to apply some of the concepts presented in an area that would benefit them in their day-to-day activities (final topic to be chosen in consultation with the Course Director). Pre-testing is available for those who might be able to place out of DPH1 and/or DPH2. Delegates who have already successfully completed Derivatives Pricing, Hedging and Risk Management (TPD) in 2007 or 2008, are eligible to enroll into DPH3 (no need to take DPH1 or DPH2). Upon successful completion, a certificate and accompanying token of achievement is presented to the recipient. Certificate Enrollment fee: $450 Please Contact us to enrol or for further information.

The following course(s) are available..

Date / No of days	Location	Fee: Course only	Fee: + accommodation	Code
28 - 29 Apr 2010 (2)	Houston, TX	USD$3100	- n/a -	#DPH2042810
12 - 13 May 2010 (2)	Calgary, AB	USD$3100 +5% GST	- n/a -	#DPH2051210
9 - 10 Jun 2010 (2)	London, UK	GBP£2500 + 17.5% VAT	- n/a -	DPH2\AGBR10
22 - 23 Sep 2010 (2)	Calgary, AB	USD$3100 +5% GST	- n/a -	#DPH2092210
17 - 18 Nov 2010 (2)	Houston, TX	USD$3100	- n/a -	#DPH2111710