Current perspectives on energy derivatives, structured products and risk management

Ehud I Ronn, Lead Modeller, MORGAN STANLEY
Michael Rosenberg, Director, Energy Trading, EMTRI

8.30 Registration

9:00 The current state of the equity and commodity markets – The ‘Message from Markets’

• Measuring the nervousness/uncertainty of equity and commodity markets
• Assessing the status of credit markets and the credit spread
• Quantifying future inflation rates
• Computing equity markets’ Expected Rates of Return and Risk Premiums
• Projecting expected/forecast crude-oil prices
• Impact of energy prices on consumer prices
• The refining spread and retail gasoline prices

10.30 Coffee break

10:45 Understanding the stochastic behavior and modeling of energy prices

• Representing energy prices using stochastic processes
• Typical energy price processes: random walk, mean reversion, Brownian motion
• Representing energy prices using stochastic processes
• Single and multi-factor models for futures and forwards
• Description of stochastic processes: Analytical, Tree, Monte Carlo

12.15 Lunch

1.15 Basics of structured products in energy

• Risk exposures of energy players: consumers, producers, traders, ‘all-purpose’ players
• No-arbitrage principle and the replicating portfolio
• Pricing drivers of derivative products: forward prices, volatilities, correlations, cross-commodity features
• Categorizing derivative products
o Extending collars: trading off risk and return with floors, caps, and collars
o Exotics: baskets, tolling/ heat-rate options for a power plant
o Real options: power swing in retail contracts

3.00 Coffee break

3.15 Risk management in energy

• Measuring price- and quantity-risk exposure at the corporate level
• Hedging corporate-level price- and quantity-risks using linear (futures/swaps) and non-linear (option) instruments
• Presenting the trade-offs of an optimal corporate risk strategy to decision-makers
• Value-at-Risk in the Energy Industry
• Overview of VAR
• “Basic Principles” of Value at Risk
• Computation of Analytical VAR

5.15 End of seminar