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Commodity and Energy Markets - Trading, Derivatives and Risk Management

Duration: 3 days
  • Commodities and Commodity Markets
  • The Economics of Commodity Markets
  • Commodity Derivatives and Structured Products
  • Trading and Hedging Commodity Risk
  • Energy Markets and Energy Derivatives
  • Trading and Hedging Energy Risk
  • Weather Derivatives, Emissions Trading and Renewable Energy
The objective of this seminar is to give you a good understanding of the functioning of commodity and energy markets and of the instruments that are traded in these markets, as well as practical understanding of how these instruments can used for investing, trading, hedging and risk management.

We start with a general introduction to commodities and commodity markets. We give you an overview of the global commodity markets, and we discuss the general characteristics of commodities such agricultural, metals, precious metals and oil. We also discuss the short and medium term outlooks for global commodity markets.

We then take a closer look at the economics of commodity markets. We discuss the global economic and geopolitical issues that affect the supply, demand and prices of commodities, and, using storage theory, we explore the relationship between spot and forward commodity prices, and we explain important concepts such as “convenience yield” and the term structure of commodity prices.

Further, we introduce commodity derivatives including futures, options and swaps. We explain their mechanics and risk-return characteristics and demonstrate how they are priced using the cost-of-carry model and a range of different option pricing models. We also explain how derivatives are used to construct structured commodity products, and we also explain and demonstrate how commodity derivatives can be used to implement simple as well as more sophisticated strategies for investing in and for trading and hedging commodity risk.

In the second part of the seminar, we look more in-depth into energy and “climate” markets. We give an overview of the energy markets and discuss how recent years’ liberation of these markets has created new opportunities for traders, investors and risk managers. We also explain the mechanics and pricing of weather derivatives such as futures and options on temperature and we demonstrate how these instruments can be used to speculate in or to hedge against “climate changes”.

Finally, we look at the relatively new and increasingly interesting and important markets for trading “pollution” such as carbon emission.

Day One

09.00 - 09.15 Welcome and Introduction

09.15 - 12.00 Commodities and Commodity Markets

  • Generic Characteristics of Commodities
  • Types of Commodities
    • Agricultural Commodities
    • Industrial and Precious Metals
    • Oil and Gas and other Energy Commodities
  • Players in the Commodity Markets
  • World Commodity Markets
  • Outlook for Global Commodity Prices

The Economics of Commodity Markets

  • Economic and Geopolitical Issues
  • Demand and Supply Factors
  • Scarcity, Reserves and Price Volatility
  • Storage Theory, Inventory and Convenience Yield
  • The Importance of Seasonality
  • Commodities and Inflation
  • Modelling Commodity Prices
  • Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Commodity Derivatives

  • Commodity Forwards and Futures
  • Pricing Commodity Forwards and Futures
    • The Cost of Carry Model
    • The Term Structure of Futures Prices
    • Contango and Backwardation
    • Components of the Return to a Commodity
  • Commodity Options
    • Types
    • Pricing and Risk Assessment
  • Commodity Swaps and Commodity Swaptions
  • CTS and other Exotic Commodity Derivatives
  • Structured Commodity Products
    • Principal Protected Structures
    • Basket, Everest, Himalaya and other Exotic Structures
  • Exercises

Day Two

09.00 - 09.15 Recap

09.15 - 12.00 Trading and Hedging Commodity Risk

  • Investing in Commodities
    • Commodities as a New Asset Class
    • Hedging Inflation and Geopolitical Risks with Commodity Investments
    • Constructing Optimal Portfolios with Commodity Investments
  • Using Futures and Options for Commodity Trading
    • Rolling the Forward Curve
    • Directional Trading Strategies
    • Volatility and Spread Strategies
    • Trading the Shape of the Forward Curve
  • Using Futures and Options to Hedge Commodity Risk
    • Long/Short Hedges with Futures
    • Hedging with Options and Exotics
    • Hedging with Swaps and Options
  • Using Derivatives to Structure Investment Products to Current Environment
  • Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Energy Markets

  • Overview of Oil, Gas and Electricity Markets
  • Global Trends in Energy Markets
    • Privatization
    • Liberalization
  • Opportunities for Investors
  • Development of Energy Investment Vehicles
  • Market Outlook

Energy Derivatives

  • Energy Futures and Options
    • Case Study: Trading at NYMEX
  • OTC Energy Derivatives
    • Case Study: Trading OTC Derivatives Online
  • Valuation and Risk Assessment
  • Exercises

Day Three

09.00 - 09.15 Recap

09.15 - 12.00 Trading and Hedging Energy Risk

  • Trading with Energy Futures and Options
    • Speculation and Spread Trading
    • Volatility Trading
    • Case Study: Trading Electricity Futures
    • Case Study: Trading Natural Gas Futures (Amaranth)
  • Hedging with Energy Futures and Options
    • Reasons to Hedge Energy Risk
    • Timing the Market
    • Customization
    • Long-Term Hedging via “Stack and Roll”
    • Case Study: How Power Generators, End Users and Marketers Hedge Electricity Price Risk
    • Risks of Using Futures and Options for Energy Price Hedging
  • Hedging with Price Swaps, Basis Swaps, Forward Contracts and Exotics
  • Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Weather Derivatives, Emissions Trading and Renewable Energy

  • Weather Derivatives
    • Temperature as a Commodity
    • CME Weather Futures and Options on Futures
    • OTC Weather Derivatives
    • Examples of Uses of Weather Derivatives for Trading and Hedging
  • Emissions Trading
    • Cap & Trade vs. Baseline & Credit
    • Major Trading System
    • The Carbon Market
  • Renewable Energy

Evaluation and Termination of the Seminar