An Introduction to Energy Derivatives

This introductory course is aimed at the energy professional with little or no knowledge of futures and options. The course focuses on demystifying the terminology and providing participants with a thorough understanding of derivatives in the context of energy markets. In this course we look in at the practical structure and applications of energy derivatives with examples taken from the oil, gas, and electricity markets.
The format for the course will follow our usual highly practical and successful style of alternate sessions of lectures and Excel based computer workshops.

COURSE OUTLINE
Day 1, AM : Introduction to Energy Derivatives I: Futures and Swaps

• Introduction to derivative instruments
• The players in the derivative markets
• The role of the forward curve
• Futures and Forward contracts
• Basis risk
• Swaps - structures and pricing
• Day to day risk management
  

Day 1, PM : Introduction to Energy Derivatives II: Options

• Options terminology and concepts
• Option payoff diagrams
• The Black-Scholes formula
• Understanding the "Greeks" (delta, gamma, and vega)
• Caps, floors, and collars
• Embedded options
• Swing options
• Understanding energy "exotics"
• Introduction to binomial trees
• Introduction to Monte Carlo simulation

Workshops:
Using payoff diagrams,
Using the Black-Scholes formula,
Using Binomial Trees,
Using Monte-Carlo simulation.

Energy Derivatives: Pricing and Risk Management

This intermediate course is aimed at the energy professional who is familiar with energy derivative products but who requires an understanding of the pricing and risk management of energy derivatives. The Excel based computer workshops deal with oil and gas as well as electricity derivatives and contain detailed calculations for pricing and risk management. At the end of the 2 days participants leave with a diskette containing answers to all the workshops as well as valuable VB code for pricing and simulation.

This course assumes that participants are familiar with standard basic option pricing theory (the Black-Scholes formula, Monte Carlo simulation, and the use of binomial trees for option pricing).

The format for the course will follow our usual highly practical and successful style of alternate sessions of lectures and Excel based computer workshops.

COURSE OUTLINE
Day 1, AM : Introduction to Energy Derivatives Modelling

• Energy derivatives - structures and applications
• Fundamentals of modeling and pricing
• Analysing energy data
• Spot price behaviour
• Building forward curves - assessing available models
• The relationship between the spot price and forward curve dynamics

Workshop: Analysing the properties of energy data - mean reversion, volatility structures, jumps

Day 1, PM :Spot Price Models and Pricing by Simulation and Trees

• Review of spot price models
• The pros and cons of spot price models
• Pricing standard options, swaptions, caps, floors, and collars
• Simulation for spot price models
• Pricing exotic options (barriers, lookbacks, Asians, etc.)
• Building and using trees for energy derivatives
• Building trees consistent with the forward curve
• Pricing options in trees

Workshop: Using Simulation and trinomial trees to price energy derivatives

Day 2, AM : Forward Curve Based Models

• Forward curve dynamics and forward curve models
• The relationship to spot price dynamics
• Multi-factor forward Curve Models
• Volatility function interpretation and estimation
• Pricing standard energy options options
• Pricing energy swaptions
• Pricing energy exotics using simulation

Workshop: Using simulation to implement multi-factor models and price energy options

Day 2, PM : Risk Management of Energy Derivatives

• Energy market risk and hedging
• Computing hedge sensitivities
• Determining the hedge instruments
• Hedging a energy derivatives book
• Value-at-Risk in energy markets - the pros and cons of the approaches
• Credit Risk in energy markets - issues and models

Value at Risk for Energy Derivatives

This intermediate course is aimed at the energy professional who is familiar with energy derivative products but who requires an understanding of the theory and calculation of Value at Risk for energy derivative portfolios. The Excel based computer workshops deal with oil and gas as well as electricity derivatives.

At the completion of the day participants leave with a diskette containing answers to all the workshops as well as valuable VB code for pricing and simulation.

COURSE OUTLINE
Day 1, AM : Understanding the VaR methodologies and issues

• What is VaR?
• Uses of VaR
• Types of VaR methodologies
• Implications of applying the RiskMetrics assumptions in energy markets
• Delta VaR, historical simulation
• Linear and Non Linear instruments

Workshop: Applying simple VaR methodologies in the energy market

Day 1, PM : Calculation of Energy portfolio VaR using simulation

• Modelling the energy forward curve - single and multi-factor
• Modelling the joint behaviour of different energies simultaneously
• Calculation of covariances and correlations
• Incorporating jumps
• Detailed example VaR calculation for an energy portfolio

Workshop: Simulating energy forward curves and calculation of VaR for an energy portfolio.

Weather Derivatives
As a result of the affect of normal variations and extreme or catastrophic events of weather and climate, a growing number of businesses and government entities are seeking out methods to manage their exposure to weather risk, which include the use of derivatives, insurance products and changes in their operations. This course provides a comprehensive and technical treatment of the valuation and risk management of weather derivatives.

COURSE OUTLINE
Day 1, AM: Introduction and Data Analysis

• Fundamentals of weather derivatives
• Weather related risks
• Recent market developments
• Weather versus financial derivatives
• Where to find information
• Heating degree days and cooling degree days
• Temperature, precipitation, wind analysis

Computer Workshop: Analysing Weather Data

Day 1, PM: Weather Derivative Structures

• Using derivatives for weather risk management
• Weather hedging strategies
• Exchange traded weather derivatives – payoffs and analysis
• Over-the-counter weather derivatives – Degree day options, calls, puts, and collars
• Temperature, precipitation and wind speed contracts
• Hedging volumetric risk

Computer Workshop: Analysis of payoffs for a range of weather derivatives using data from various regions

Day 2, AM: Basics of Modelling Weather for Pricing Derivatives

• Summary of weather derivative pricing approaches
• Will Black-Scholes do?
• Historical simulation (Burn Analysis)
• Introduction to Monte Carlo simulation for weather derivative pricing
• Pricing weather derivatives

Computer Workshop: Using Burn Analysis and Monte Carlo simulation for pricing a range of weather derivatives.

Day 2, PM: Advanced Models for Weather Derivative Pricing

• Introducing more advanced techniques – mean reversion, jumps, time varying patterns for seasonality, joint modelling of regions
• Value-at-risk for weather derivatives – Correlations and extreme events

Computer Workshop: Using advanced models for pricing a range of weather derivatives