Energy Markets and Energy Derivatives

An intensive guide to the enrgy industry, developed to enhance your modelling, pricing and risk management capabilities.

Course Highlights

What I liked the most about this course is the knowledge and experience of the trainer and the intereactions with other delegates. Excellent!

O.C., PricewaterhouseCoopers

Over three hands-on days you will gain:

A comprehensive review of state-of-the-art approaches to modelling energy prices and pricing energy derivatives
A clear practical understanding of the major energy derivative structures and their applications
Practical tools for using energy derivatives for hedging price and volumetric exposures
A detailed understanding of the latest techniques for valuing and hedging real options
An appreciation of value-at-risk methodologies applied to the energy industry

For details of the course trainer, please download the course brochure

Booking Information

Dates	Prices	Book This Course	Discount
27 - 29 Sep 2010	£ 2399		-
23 - 25 Feb 2011	£ 2399		-

Course Programme

What I liked the most about this course is the knowledge and experience of the trainer and the intereactions with other delegates. Excellent!

O.C., PricewaterhouseCoopers

The Structure of Energy Markets

Global, for example oil, LNG
Regional, for example natural gas
Local (relative term), for example power pools
Physical and financial energy markets
– Physical markets
– Delivery example
– Financial markets
– Why are there financial markets?
– Hedging and risk transfer
– Speculation
Trading Markets, turnover statistics (oil, gas, power, biofuels)
– Market participants
- Exchanges and standardised products

Understanding Energy Contracts

Futures and forwards
– Example power and natural gas contract
Derivatives:
– Cross commodity derivatives
– Spark
– Dark
– Crack spread
– Temperature contingent options
– Structured products
– Virtual power plant
– Gas storage
– Gas swing

Case Study:
Identifying energy derivatives in structured products. Structured products, including gas swing, tolling deals, and gas storage contracts are used to familiarise the participants
with commonly-utilised energy contracts. The contracts are also analysed so the participants learn to recognize the derivatives embedded in energy contracts.

Practical Valuation in Energy Markets

Spot, forwards and futures
– Forward curves, examples
– Backwardation
– Contango
Price Dynamics and equilibrium
– Diffusion processes
– GBM
– OU
– Jumps
Options
– How option valuation is different from other markets, for example in equity markets
– Assumptions behind commodity price returns
– Closed form solutions
– Approximation solutions
– Computational solutions
– Algorithms
– Monte Carlo
– Simulations
– LSMC
Real Options
– Power plant valuations
– Gas storage valuation
– Swing valuation

Case Study:
Simulating energy prices. This simulation exercise is designed to familiarise participants with price processes in energy markets. The price processes are built in increasing sophistication, from GBM to OU, to Jump diffusion models.

Case Study:
Valuing energy derivatives. Building upon the simulation exercise, participants are shown how to value energy derivatives with simulated prices. These valuations are compared to the closed form solutions for energy derivatives. The case investigates the advantages and disadvantages of the different approaches to pricing derivatives.

Utilising the Energy Markets for Hedging Price and Volumetric Exposures (Risks)

Hedging a vanilla contract
– Compute optimal hedge ratio
– Locking-in a spread
Hedging extreme events
– Tail risk
– Using derivatives to hedge non-linear risk
Hedging volumetric (weather) risk
– Temperature contingent risk
– Precipitation risk, hydro risk
– Wind risk
OTC
Cleared
– Counterparties
– Margining
– Marking to Market

Case Study:
How to execute an energy market transaction. A total of three practical examples are provided for the weather, gas, and power markets.

Managing a Portfolio of Trades

What is price risk (emphasis)?
How does one measure risk?
What is VaR?
– Parametric VaR
– Non-parametric VaR
The Greeks

Understanding other Risks

Operational risk versus financial risk
Credit risk
Liquidity risk
Execution risk (traders' limits)
Basis risk
– Location
– Time
– Product specification
Case Study:
Calculating Parametric and non-Parametric VaR. The participants will compute VaR for a portfolio of energy derivatives utilising different methods. The importance properly simulating prices is emphasised and used to tie in the three day course.