Financial Derivatives Valuations and Controls Best Practices - FDV 

CPE Credits Awarded: 16
Categories: Trading, Derivatives, Hedging and Risk Management, Global Association of Risk Professionals (GARP) Approved Course

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Gold CourseFinancial Derivatives Valuations and Controls Best Practices (FDV) is an instructor-led course presented by the energy training experts at Mennta Energy Solutions. This course will help delegates gain a deeper understanding of common derivatives product control activities.

The course explores the commodity derivatives lifecycle, front-to-back office flows as well as best practices in derivatives valuation and disclosures.  Delegates will learn how to design and implement a comprehensive profit and loss attribution framework for both linear and non-linear books.  Finally, delegates will leave the course with an understanding of best practices in product control activities such as transaction and limit monitoring, compliance, new product approvals, and trading risk policies and procedures. Delegates can look forward to several case studies and hands on exercises that will be used to explore and put into practice the learnings in an applied context.

Please note: a laptop and Excel version 2007 or later is required in order to engage in market data.

Learning Objectives

  • Gain a deeper understanding of common derivatives product control activities
  • Understand the various steps in the derivatives lifecycle
  • How to perform and report profit and loss (P&L) on accurate, timely and meaningful basis
  • Conduct derivatives and physical trade valuations, including counterparty and liquidity adjustments
  • How to conduct P&L attribution for linear and non-linear books
  • Techniques to reconcile P&L differences with trading teams and counterparties
  • Learn best practice price verification procedures to ensure appropriate portfolio valuations
  • Assess new products for appropriate valuation, accounting treatment, and disclosure in the financial statements
  • Review new trades, understand the structure, associated risks and P&L sources
  • Develop key performance indicators (KPIs) for product control
  • How to effectively explain daily, weekly and monthly P&L movements
  • Implement a high standard of internal controls around mark-to-market accounting
  • Ensure the integrity of the data used for P&L analysis with an efficient data governance process
  • Effectively interact with quantitative teams providing valuation for structured product and complex instruments

 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

GARP rgbMennta Energy Solutions is registered with GARP as an Approved Provider of Continuing Professional Development (CPD) credits. Mennta Energy Solutions has determined that this program qualifies for 16 GARP CPD credit hours. If you are a Certified FRM or ERP, please record this activity in your Credit Tracker at

  • Derivatives product control specialists
  • Commodity derivatives specialists
  • Internal audit and compliance
  • Market and credit risk managers
  • Derivatives back office teams
  • IT trading support teams
  • Operational risk managers
  • Derivatives accounting and treasury managers
  • Front-office trading support teams

Overview of key concepts

  • Market prices – spot, forward, futures and swap prices
  • Forward curves
  • Risk categories: market, counterparty, operational, operations, liquidity
  • Long, short and neutral price exposures
  • Case study: Identifying and computing flat price and basis exposures
  • Instruments and payoffs – physical, futures, forwards, swaps, options
  • Case study: Exposures from cargo purchases and sales at average floating and fixed prices

Commodity lifecycle and front-to-back office flows

  • Commodity Lifecycle events
    • Trade capture and revisions
    • Controls processing
    • Settlements (pre and post settlement activity)
    • Option exercise (physical and financial)
    • Collateral margining
    • Close Outs (Terminations, Trade compressions, assignments and novations)
    • Natural maturity
  • Front office: Exposure and limit management; first line of defence
  • Middle Office: MtM, P/L, risk metrics
  • Commodity Trading and risk management systems (CTRM)

Introduction to Commodity Derivatives Valuation and Disclosures (I)

  • Introduction to Fair Value: Mark-to-model vs. Mark to Market
  • Mark to Market (MtM) vs. Profit and Loss (P/L)
  • Forward curves in illiquid markets
  • Case study: Using forward curves for mark-to-market and risk analysis
  • Data governance for derivatives valuation
  • Valuation of forward contracts and swaps using forward curves in Excel
  • Valuation of Options using Black-76: Introduction to volatility skews and surfaces
  • Types of basis risk: calendar, location, quality, product
  • Case study: ‘classic’ mistakes to avoid around valuation and P/L calculations
  • The role of product control in the review process for new products

Profit and Loss Attribution – Linear Books

  • Sources of P&L in energy trading books – flat price vs. basis exposures
  • How to design and implement a comprehensive P&L attribution framework
  • The importance of book and database structure
  • P&L attribution by risk factor (e.g. forward curves, locations, commodities…)
  • Case study: Setting up a trading hub hierarchy to explain P&L changes
  • P&L broken down by existing positions, new positions and residual exposures
  • Commissions, fee income/expense and day-1 P&L
  • Impact of cash flows (e.g. settlements), time and interest rate changes, and correction, cancellation or exercise of a trade
  • Calculation of volatility of comprehensive P/L
  • Dealing with the unexplained portion: When to escalate potential problems for further investigation
  • Derivatives mark-to-market accounting vs. accruals
  • Analysis of accounting vs. economic implications of hedging

Profit and Loss Attribution – Non-linear books

  • Intrinsic vs. extrinsic value of options, structured products and assets
  • P&L attribution with sensitivities vs. full revaluation
  • Risk matrix for option books
  • Review of option Greeks
  • P/L attribution with Greeks: Delta, gamma, vega
  • Case study: Explaning P/L changes for a commodity derivatives book with optionality
  • P&L decomposition for assets with cross-market exposures: Power generation and refineries

Introduction to Commodity Derivatives Valuation and Disclosures (II)

  • Portfolio valuation and liquidity Levels (IFRS 7)
  • Use of bid-ask spreads vs. mid curve prices
  • Case study: Analysis of commodity derivatives disclosures by leading energy market player
  • Counterparty Valuation Adjustments (CVA)
  • Hedge effectiveness and accounting considerations (IAS 39 and IFRS 9)
  • Developing hedge effectiveness documentation and processes
  • Gross and net derivatives exposures taking netting and collateral into account
  • Case study: Review of PwC analysis of MtM practices at Noble Group

Transaction monitoring and compliance in energy and commodity trading

  • Internal control systems to monitor compliance
  • Transaction and trade amendments
  • Recordkeeping and compliance
  • How to identify unusual trading patterns and behaviors.
  • A 3-step process to identify potential manipulation
  • Case study: BP alleged gas market manipulation

Risk policies and procedures

  • Risk control and market risk management of derivatives
  • Scope, objective and purpose of the risk policy
  • Policies, infrastructure and methodologies framework
  • Valuation process: Management controls and key risk indicators
  • Risk tolerance, risk appetite, risk metrics and trading limits
  • Value at Risk and Backtesting: Clean vs. Dirty P/L
  • Best practice recommendations by the Committee of Chief Risk Officers

Course Discussion and Wrap-up



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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