Intermediate Derivatives Markets, Hedging and Risk Management (CLASSROOM) - DPH2
Course Schedule
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*Prices do not include VAT, GST, or any other local taxes. All applicable taxes will be added to the invoice.
**Please register by the deadline to help us ensure sufficient attendance and avoid postponing the course.
Course Summary
Intermediate Derivatives Markets, Risk Management and Hedging is a two-day instructor-led program presented by the energy training experts at Mennta Energy Solutions. This is an intermediate course for professionals interested in improving their knowledge of energy derivatives instruments, trading, hedging and risk management.
Delegates will learn how to capture the main characteristics of energy price behavior in valuation and risk models using applied probability and statistics. After introducing the building blocks of risk analysis, multiple exercises show how to calculate volatilities, correlations, Value at Risk and other risk metrics with hands-on calculations in Excel.
The course explores market risk management of energy derivative portfolios with emphasis on risk limits and setting up an effective control framework. Delegates will learn to calculate and interpret some of the main metrics used to manage and report market risk in energy portfolios such as VaR, Stress Tests and Backtesting. Various hands-on case studies show the step-by-step calculations for Variance-Covariance, Monte Carlo and Historical Simulation VaR for energy portfolios.
The course also covers basis risk management with basis swaps and spread options and the use of correlation and regression to identify and measure basis risks. Case studies will explore how establish proxy hedges in illiquid markets using commonly traded benchmarks.
Advanced option strategies like costless collars, 3-way collars, straddles and other structured products are shown in an applied context, with emphasis on understanding the benefits and limitations in comparison to other hedging instruments.
The course also explores the main option “Greeks’ (Delta, Gamma, Vega and Theta) using practical exercises and applications for trading, hedging and risk management. We will also show how to conduct Profit and Loss decomposition for an energy derivatives book using Greeks.
Delegates will also learn how to identify optimal hedges at the portfolio level using different risk metrics and how to implement a delta-hedging strategy in the context of asset-back trading with optionality.
Please note: a laptop and up-to-date version of Office would be an advantage in order to engage in market data; however it is not essential.
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
Course Content
201: Review of Energy Price Behavior, Probability and Statistics
- Overview of energy price behavior; seasonality; mean reversion; spikes
- Volatility structure in energy markets; spot vs. forwards
- Probability distributions; moments of a distribution, histograms.
- Excel exercises with hands-on calculations of volatilities, correlations
- Introduction to Monte Carlo simulation in Excel using normal distributions
- Case study: VaR calculation for a single exposure.
- Calculating and interpreting rolling window volatilities and correlations in Excel
202: Market Risk Management for Energy Trading (I)
- Best practices of market risk management in energy markets
- Market risk policies and procedures: Key components and effective oversight
- Case study: interpretation of market risk disclosures for large energy firm
- Understanding VaR and Expected tail loss (ETL)
- A simple way to calculate VaR: Top Down Approach
- Risk limits and risk reports
- Backtesting market risk models
- Oil, power and gas specific issues
203: Market Risk Management for Energy Trading (II)
- VaR methodologies
- Choice of confidence level and horizon
- Excel Case Studies for energy portfolios
- Analytic or Variance Covariance VaR.
- Review of Matrix Multiplication in Excel
- Monte Carlo Simulation
- Geometric Brownian Motion
- Simulating correlated market prices
- Historical simulation
- Comparative Analysis of VaR methodologies
204: Stress Testing and Backtesting for Energy and Commodity Firms
- Designing and conducting stress tests for energy portfolios
- Why do we need to conduct stress tests to manage certain energy exposures?
- Benefits and limitations of stress tests
- Group exercise: Creating and presenting stress test reports
- Integrating stress tests in the risk modeling process
- Reverse stress tests for energy portfolios
- Stress tests for crude and products; gas; electricity
205. Analysis of Derivative Strategies
- Review of key option concepts.
- Zero-cost collars. Uses and misuses.
- Case Study: Using Zero Cost Collars in a Hedging Program
- Call and Put spreads. Main uses
- Three-way Collars: Aggressive vs. Conservative strategies
- Volatility Plays: Straddles and Strangles
- Comparing the risk and benefits of various hedging strategies
206: Understanding option sensitivities through the "Greeks"
- Review of Black-76 and valuation of options
- Option Greeks: Definition, calculation and main uses
- Sensitivity vs. Price: Delta and Gamma
- Volatility exposure and Vega
- Theta and time decay.
- Case study: calculating and visualizing "Greeks" in Excel
- Analyzing the dynamics of delta, gamma and vega for a straddle position
- Taylor series expansions and the use of Greeks to conduct P/L decomposition
- Case Study: Identifying price and volatility views using P/L decomposition
207: Basis Risk Management and Derivatives in Energy Markets
- Types of basis risk
- Managing basis risk with basis swaps
- Case study: Managing NYMEX/ICE basis risk with OTC basis swaps
- Hedging with futures and basis swaps
- Understanding and using correlation in valuation and risk measurement.
- Case study: Spread option valuation and Greeks
- Optimal hedge ratios: Calculations, uses and limitations
- Case study: Best hedges and trade risk profiles using risk metrics
- Hedge Effectiveness Criteria. Ex-ante vs. Ex-post Tests.
208: Integrated market risk management and decision support
- Market Risk metrics: Review of VaR methodologies.
- Excel case study: Comparative Analysis of VaR methodologies for sample portfolio
- VaR for option portfolios using simulation vs. delta-normal method
- Asset-backed Trading and Implied Market Views
- Delta hedging in asset-backed trading: Practical considerations
- Case study: Cargo arbitrage with destination options: Position reports, delta-hedging and valuations
