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Advanced Modelling and Analysis of Commodity Derivatives

Day One

Fundamentals of Commodity Markets

  • The basics of commodity markets
  • Forwards, futures and swaps
  • Cost of carry
  • Seasonality in energy prices

The Forward Market

  • Physical versus Financial markets
  • Contango and backwardation
  • Constructing the forward curve
  • Spot versus curve contracts

Workshop: The Electricity and Gas Forward

  • CurveCascading contracts
  • Shaping the curve

Commodity Derivatives

  • General introduction to derivatives
  • Commodity futures options
  • Commodity swaps
  • Commodity structured products
  • Physical/Embedded optionality

Basic Commodity Models

  • Overview of Black-Scholes and Black's (1976) model
  • Volatility
  • Mean reversion
  • Jump diffusion models

Workshop: Commodities Modeling

  • Implementing Black-Scholes in the commodity markets pricing of commodities structured products

Day Two

Analysing Volatility in the Commodity Markets

  • Estimating historic volatility
  • Implied volatility for commodity derivatives
  • Volatility skews and smiles and term structure
  • Stochastic volatility models

Workshop: Volatility

  • Estimating volatility of commodity markets

Monte-Carlo Methods for Pricing Commodity Derivatives

  • The basic principles of Monte-Carlo simulation
  • Implementing a Monte-Carlo pricing engine
  • Improving Monte-Carlo methods
  • Exotic commodity derivatives

Workshop: Univariate Monte Carlo Methods

  • Pricing of exotic options using Monte Carlo

Risk Management and Hedging in the Commodity Markets

  • The Greeks
  • Delta hedging
  • The Gamma-Theta trade off
  • Delta-Gamma-Vega Hedging

Correlation in Commodities Markets

  • The basics of correlation
  • Spread options and other correlation sensitive derivatives
  • Margrabe's model
  • Kirk's approximation
  • Monte-Carlo simulation of correlated commodities

Workshop: Pricing of Spark Spread Option

  • Implementation of multivariate monte carlo method
  • Pricing of a spark spread option

Day Three

Advanced Commodities Models

  • Implied distribution
  • Truncated distributions
  • Vanna-Volga model
  • SABR

Workshop: The Vanna-Volga Model

  • Implement Vanna-Volga model

FX Component in Commodities

  • Quanto and compo forwards
  • Quanto and compo options
  • Quanto pricing

Advanced Risk Management

  • Proxy hedging
  • Uncertainty versus volatility
  • Correlation hedging
  • Quanto hedging

Modeling Physical Optionality

  • Locational optionality
  • Timing optionality
  • Shipping
  • Storage

Workshop: Monetizing Options

  • Delta-hedging OTM options