Course Summary

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 valuation, hedging and risk management of derivatives portfolios and physical assets such as generation assets, storage facilities, refineries and pipelines. 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 also covered. The course also covers hedging strategies 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 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?

The course is targeted for practitioners and decision-makers, end-users of pricing, hedging and risk models, with emphasis on explaining the concepts behind the theoretical models and enhancing the delegates' understanding on the various models and strategies used to price, hedge and manage the risk of derivatives and physical assets.
Not sure if you have the appropriate experience? Click here to test yourself on the knowledge necessary for this course.

Course Contents

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

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
22 - 23 Apr 2010 (2)	Calgary, AB	USD$3200 +5% GST	- n/a -	#DPH3042210
26 - 27 May 2010 (2)	Houston, TX	USD$3200	- n/a -	#DPH3052610
16 - 17 Jun 2010 (2)	Anaheim, CA	USD$3200	- n/a -	#DPH3061610
16 - 17 Aug 2010 (2)	Singapore	USD$3650 + 7% GST	- n/a -	DPH3\ASGP10
6 - 7 Dec 2010 (2)	London, UK	GBP£2600 + 17.5% VAT	- n/a -	DPH3\AGBR10