Advanced Commodity Derivatives: Risk Management & Hedging in Energy, Metals, & Agricultural - CDPH3 

CPE Credits Awarded: 16
Categories: Trading, Derivatives, Hedging and Risk Management

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The course covers advanced hedging and risk management topics such as applications of marginal VaR analysis, and Extreme Value Theory VaR are presented. Counterparty risk management and Potential Future Exposure (PFE) calculations are also covered.

The course is targeted for practitioners and decision-makers, end-users of pricing, hedging, and risk models that want to enhance their understanding of the concepts behind the theoretical models and strategies used to price, hedge, and manage the risk of physical supply contracts, derivatives, and physical assets in commodity markets.



  • Producers, Integrated firms, Physical Traders, End-users, Marketers, Financial Institutions, Investment funds, Utilities, Co-operatives


  • Market and credit risk managers
  • Chief Risk Officers
  • CFO, Treasurer, Analysts
  • Back office and operations
  • Audit and Accounting teams involved with derivatives activities
  • IT departments servicing risk groups

Management teams: Metals, Agricultural, and Energy Markets

  • Metals: Base Metals (Aluminum, Copper, Zinc), Precious Metals (Gold, Silver) and Ferrous Metals (Iron ore)
  • Agriculture: Wheat, Corn, Biofuels, Cocoa, Coffee, Soybeans, Palm Oil, Sugar, Weather
  • Energy – Crude Oil, Products, Natural Gas, Coal, LNG


Review of CDPH1 and CDPH2

  • Spot, basis, and forward prices in commodity markets
  • Overview of derivatives contracts in commodity 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
  • Market risk management: VaR, stress tests, backtests

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 metals and agricultural 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, fx-commodity price risks

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

  • Forward curve behavior
  • Analysis of gold 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

  • Real option in commodity markets
  • Case study: Mining projects and Real Options
  • Commodity transportation capabilities as a locational spread
  • Generation assets and Refineries as real options
  • Understanding and valuing the optionality in storage facilities
  • LNG trading and locational spread and timing options

Advanced Market Risk Management for Commodity Trading

  • Introducing volatilities as risk factors
  • Advanced historical simulation: EWMA HS and volatility-updated HS
  • Marginal VaR analysis: applications for hedging and risk management
  • Case study: Identifying natural portfolio hedges in commodity portfolios
  • 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
  • Key insights from behavioral finance regarding misperception of extreme risk probabilities
  • Case study: diagnosis and recommendations for model improvements based on backtest results

Earnings at Risk and Cash Flow at Risk

  • Earnings at risk and cash flow at risk for multiple maturities
  • Natural risk drivers and macro hedges
  • Margin-at-risk calculation and liquidity risk management
  • Dynamic simulation of portfolios responding to changing market conditions
  • Evolution of prices, volatilities, and correlations in a dynamic simulation framework
  • Integration of commodity, FX, and Interest rate risks
  • Case study: Use of Cash Flow at Risk by BHP Billiton

Counterparty Risk Management

  • Potential counterparty exposure for commodity derivatives
  • Counterparty risk trading in commodity trading
  • Expected vs. potential future exposure
  • Case Study: Step by step PFE Excel calculations and interpretation for forwards, swaps and options
  • Counterparty VaR and dynamic potential exposure
  • Potential exposure and the role of margin, collateral, and settlements
  • Adding default probabilities for different time frames
  • Using potential credit exposure to determine limits

Advanced Derivatives Valuation and Hedging

  • Pricing and hedging options with volatility surfaces
  • Calculation and use of skew-adjusted delta and gammas
  • Case study: Stress Test Matrices with Price and Volatility Shocks
  • Volatility surfaces and implied price distributions
  • Stochastic volatility models in commodity markets
  • Valuation and hedging of exposures with volumetric risk


DR CARLOS BLANCO is an expert in energy, commodity, and financial risk management and modeling. He has been a faculty member of Mennta Energy Solutions 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).

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Mennta Energy Solutions (formerly The Oxford Princeton Programme, Inc.) is not affiliated with Princeton University, Oxford University, or Oxford University Press.