Advanced Structuring & Risk Unbundling
Day 1
Review of Risk Management Fundamentals & Terminology

• Risk identification
• Forward pricing: theory vs. reality
• Relationship of physical energy vs. index cash flow
• Transaction diagramming
• Hedging energy risk positions using options
• Understand option payout structures
• Comparing option and non-option hedge strategies

Advanced Option Hedge Structuring

Option Spreads and Costless Collars

• Call and put spreads
• Option spread strategies
• Engineering zero premium structures
• Advanced collar structures
• Three-way collars
• Participatory collars
• Volumetric structuring
• Fixed-price participation structuring

Inter-seasonal & Multi-Fuel Structures

• Inter-seasonal costless collar
• Time value advantages
• Costless dual-fuel collars

Multiple Option Risk Structures

• Straddles
• Swing as an embedded long straddle
• Butterflies
• Ratio call spreads

Options on Swaps & Term Energy Contracts

Off-Market Fixed-Price Transactions

• Fixed-price contracts priced above/below the market price
• Cash flow implications of off-market structures
• Using off-market transactions in deal structuring
• Blend and extend structures

Options on a Fixed-Price Term Contract

• Call & put swaptions
• Option of term physical contracts
• Swaption pricing compared against options strips

Extendibles & Cancelables

• Comparing an extendibles vs. a cancelable contract
• Structure of extendible
• Embedding the swaption
• Iterating to eliminate the up-front premium requirement

Reducing Supply Cost by Structuring a Cancelable Contract

• Selling the swaption
• Structuring the supply package

Advanced Swaption Structures

• Capitalizing and extracting value from the future
• “Blend & Extend” swaptions

Managing Calendar (Time) Spread Risks

Trading Time Spreads

• Time spread as measure of contango/backwardation
• Buying and selling time spreads
• Time spread as storage cost
• Storage as a long time spread

Risk Control using Time Spreads

• Time spread risk
• Rollover hedging
• Advantages and disadvantages of rollovers
• Evaluating the full cost of gas using rollovers

Time Spread as a Forward Price Risk Component

• Decomposing forward price risk into time spread risks
• Managing price risk separate from time spread risk
• Exploiting ‘outlier’ points on a forward price curve
• Locking in gas pricing at a margin below the prior year

Stack and Roll Hedging

• A common hedge strategy in energy markets
• The mechanics of stack and roll hedging
• Risks inherent in stack and rolling strategies

Managing Storage with Stack and Roll

• Managing unknown volume and timing of exposures
• Coordinating storage exposures with the hedge
• Residual time spread risk
Day 2
Multiple-Fuel Structuring

Trading and Structuring Spark Spreads

• Extending basis swap concept to cross-commodities
• Using multi-fuel structures to optimize risk taking
• Trading natural gas against electricity
• Synthetic generation
• Converting heat rates to thermal efficiency ratings

Trading and Structuring Spark Spreads

• Pricing spark spread swaps
• Heat rate implications on spark spread pricing
• Embedding spark spread swaps
• Guaranteeing the competitive position of natural gas vs. power
• Direct tolling
• Market tolling rates

Unbundling Embedded Risks I

Reverse Engineering

• Reasons to reverse engineer
• Pricing complex contracts as sum of component prices
• Monetizing embedded values
• Identifying component risks
• Division of risks within the trading room
• Decomposing complex structures

Embedding Derivatives within Derivatives

• Identifying risk positions
• Division of responsibilities

Building Blocks of Financial Engineering

• Relationship between fixed-price and options
• Parity as a structuring tool
• Creating a call position from a put
• Option pricing discipline
• Arbitraging option premiums

Unbundling Embedded Risks II

Identifying Specific Embedded Risk Positions

• Using payout diagrams • Identifying embedded options • Implicit option writing • Embedded collars

Volume and Term Flexibility
 
• Analyzing swing provisions
• Embedded caps & floors: double-ups
• Embedding swaptions: extendibles
• Cancelables
• Embedded barrier and digital options

Unbundling Multi-Fuel Structures

• Multi-fuel pricing structures
• Identifying the pricing components

Monetizing Embedded Risk Positions

• Arbitraging miss priced physical supply
• Finding value in existing contracts
• Monetizing value of swing
• Stripping supply contracts