Commodity Derivatives Introduction: Risk Management & Hedging in Energy, Metals, & Agricultural - CDPH1 

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

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Gold CourseCDPH 1 provides an overview of commodity derivatives and physical markets as well as the main instruments traded in those markets. We will explore the main differences between physical and paper transactions in addition to exchange-traded and OTC products. We will show how to trade and understand the risk of futures, forwards, and swaps to mitigate market risk.

This highly interactive workshop uses practical case studies, Excel exercises, and group discussions to reinforce the concepts presented in the lectures. The course will also provide an overview of option contracts and hedging and speculation strategies using options and simple structures. We will cover strategic and tactical issues around hedging with commodity derivatives and will explore alternative hedging alternatives for producers and end-users. The course will introduce structured products and uses in hedging programmes.


Upon completion of this course your employees will understand:



  • 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


Overview of Commodity Physical and Financial Markets

  • Overview of commodity markets, risks, and players
  • Why are specific commodity markets different?
  • Risk dimensions in commodity markets: price, basis, volume, weather, regulation, operations.
  • Exchange-based and OTC trading
  • Impact of physical delivery
  • Main commodity organized exchanges
  • The mark-to-market process
  • Clearing, collateral, and margin issues
  • Case study: Mark-to-market and Margin Calculations for a futures position

Spot Prices and Forward Curves in Commodity Markets

  • Spot (cash) prices: main characteristics
  • Forward price curves: contango and backwardation
  • What does the forward curve tell us?
  • Case study: Analysis of Gold, Silver, Copper, Aluminum, Wheat, and Natural Gas forward curves
  • Arbitrage relations and forward curves
  • Case study: Gold contango and lease rates
  • Impact of storability and transportation
  • Building forward curves in illiquid markets
  • Case study: building forward curves for mark-to-market and risk analysis

Using Commodity Futures, Forwards, Swaps

  • Commodity forward, and futures contracts
  • Linear vs. non-linear payoffs
  • Hedging with futures, forward and swaps
  • Case study: Hedging expected fuel consumption with forwards
  • Index swaps and fixed for floating swaps
  • Case study: Hedging supply contracts with fixed and index prices
  • Exchange for Physical (EFP) and Exchange for Swaps (EFS)

Using Commodity-based Options: Hedging and Speculation

  • Review of options types: calls, puts
  • Buying and selling options: understanding option payoffs
  • Why use options vs. other instruments?
  • What are the main drivers of option premiums?
  • Individual options vs. strips of options: examples
  • Case study: Using options as Insurance for Commodity Producers

Structured Products and Option Strategies

  • Average price (Asian) options in Commodity Markets
  • Zero-cost collars
  • Case study: Feedstock hedging by biofuels producers with zero-cost collars
  • Barrier and Digital options: knock-outs and kick-ins
  • Options on Swaps (Swaptions)
  • Structured Swaps: Extendable, Participating, Double-up
  • Case study: Using structured products for hedging (and speculation)
  • Case study: Uses and misuses of structured products in hedging programmess

Strategic and Tactical Issues around Hedging with Commodity-based Derivatives

  • Designing and effective hedging program
  • Ensuring that risk management is aligned with the corporate strategy and is clearly communicated and consistently applied
  • Understanding operations and entity wide objectives
  • Case study: Setting up the risk appetite of the organization
  • Defining risk management activities and terms.
  • Dealing with regret and “Monday-morning quarterbacks”: Establishing procedures for obtaining, monitoring and communicating risk management activities and their results.
  • Case study: Fuel cost hedging strategies for a mining company
  • Evaluating the impact of inaction vs. hedging. Natural hedges and risk management strategies.

Basis Risk and Basis Risk Hedging

  • Basis and Spread risk in agricultural, metals, and energy markets
  • Basis Swaps – Uses and Valuation
  • Case study: Hedging refinery margins with a Crack Spread Swap
  • Basis risk and Foreign Exchange risk
  • Case study: Hedging Wheat price risk in Australia with Chicago Board of Trade, Kansas City Board of Trade, and Minneapolis Grain Exchange futures.
  • Drivers of premiums on options with more than one underlying
  • Hedging commodity and foreign exchange risk with Quanto swaps and options

Introduction to Derivatives Valuation and Disclosures

  • Introduction to Fair Value
  • Mark-to-model vs. Mark to Market
  • Valuation of forward contracts and swaps using forward curves in Excel
  • Valuation of Options using Black-76: Introduction to volatility skews and surfaces
  • Liquidity Levels
  • Case study: Derivatives disclosures of Namoi Cotton Co-operative
  • Policy and Derivatives Use Disclosures
  • Hedge effectiveness and accounting considerations


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.