Day 1
Energy Risk Overview
Enterprise Risk in an Energy Company
• Categories of risk faced the energy risk manager
• The critical role of physical supply risk
• Force Majeure and its implications
• Credit & operational risk
• Risks embedded in contracts and operations
• Identifying exposure to price and spread risks
• Indexation and its implications to risk exposure
Financially Settled Energy Contracts
• Energy swaps
• Advantages of financial contracts vs. physical contracts
• Separating Physical Supply Risk from Financial (Price) Risk
• Indifference between physical energy and its financial equivalent, index cash flow
• Using NYMEX futures as a financially settled hedge (i.e. a swap)
• Gas Daily swaps
Extending Swap Hedging Beyond Energy Prices
• Weather hedging
• Cargo/Tanker/LNG shipping rates
• Storage swaps
• Volatility swaps
Optionality in Energy
The Broad Concept of Optionality Required in the Energy Business
• Options as asymmetrical payouts
• Calls and puts as asymmetries
• Financially settled energy options
Hedging Physical Positions with Options
• Producer hedging energy sales by buying a put
• Consumer hedging energy purchases by buying a call
• Comparing fixed price vs. option hedge strategies
• Collar strategies.
Identifying Optionality Embedded in the Energy Business
• Asymmetrical payouts in business operations
• Supply contracts with embedded options
• Optionality embedded in physical operations
• Synthetic assets contained within put and call structures
• A call strip as synthetic peak generators
• An American call as synthetic storage
Pricing Energy & Energy Options
Pricing Energy in the Forward Market
• Arbitrage discipline
• The ‘cost-of-carry’ theory of forward pricing
• Why forward prices in energy do not conform to theory
• Backwardation and physical supply risk
• Synthetic forwards
• Arbitraging the forward market using storage
Utilizing the Forward Price Curve
• Pricing and position valuation
• Developing selective hedge tactics
• The role of the forward price curve in analyzing capital investments in energy
• Recognizing trading positions embedded in investments in energy assets
Pricing Optionality
Pricing Parameters
• Price curve, strike price, time and interest rates
• Trading volatility
• Defining the value/premium of optionality
• Differences between energy and equity option pricing
Option Pricing Models (Black Scholes)
• Model assumptions
• Testing the applicability of model assumptions to energy markets
• Measuring intrinsic value and time value
• The profile of time value
• The volatility term structure as unique to energy
Arbitrage Discipline in Option Pricing
• Put-call parity
• Synthetic puts and calls
• Option premium arbitrage
• Applying put-call parity to developing hedge strategies and transaction engineering
• Volatility smiles and skews
• Volatility term structure
Day 2
Basis Trading
Basis and Transportation
• Defining location basis
• Basis as synthetic transportation
The Basis Swaps as a Risk Management Tool
• Basis as a risk to a hedger
• The structure of the basis swap
• Pricing basis transactions
• Understanding bid-offer quotes in the basis market
Using the Basis Swap to Hedge Location Risks
• Managing natural gas basis risk
• Hedging transport/transmission costs with a basis swap
• Managing price risk using basis swaps
• Using a basis swap to eliminate basis risk
Pricing Physical Natural Gas Forward
• Pricing from the benchmark price curve
• Embedded options — swing
• Credit and capital adequacy
• Combining value components to price delivered gas forward
Congestion Revenue Rights as a Basis Swap
• Locational Marginal Pricing
• Fixing transmissions costs with a basis swap (CRRs)
Using Basis Swaps to Transform Risk
• Using a basis swap to optimize risk/return
• Using the basis swap to synthetically transport energy
• Spark spread swaps
Energy Futures
Futures are one of the key building blocks of derivative products. This section introduces participants to exchange traded futures and shows the important differences between the various traded energy contracts. It continues with an introduction to basic hedging techniques before exposing participants to the practical issues involved in settling contracts through EFPs and EFSs.
The Futures Contract
• Exchange-traded contracts
• Comparison — futures vs. swaps
• Standardized terms
• The NYMEX Natural Gas Contract
The Mechanics of Margins
• Original margin
• Variation margin
• Cash liquidity risk
Paper Hedging Using Futures
• Physical delivery under NYMEX
• Infrequency of physical delivery
• Hedging a risk position using futures contracts
• NYMEX look-alike swaps
• Comparing futures and swap hedge strategies
Exchange of Futures for Physicals (EFP)
• Using EFP Settlement
• EFP vs. basis swaps
• Exchange of Futures for Swaps
