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