Introduction to risk and risk management
• Return is only half the equation
• The risk management process
(Identify, Measure, Control)
• Risk versus reward
• Optimizing portfolios
• The risk management process
Types of risks
• Operational risk
• Geo-political risk
• Regulatory risk
• Market/price risk
• Counterparty/credit risk
• Currency risk
• Liquidity risk
• Legal Risk
• Natural risk, weather risk & transport risk
Market overview
• Market participants (Traders, Hedgers, Speculators)
• Types of products (Gas, Power, Oil and other products)
• Market efficiency in energy markets
SIMULATION: Speculation – Margining & VaR
Energy trading and trading risk
• Physical trading & associated risk
• Bottlenecks in delivery and capacity (and associated risks)
• Nominations (shippers and program responsible parties)
• Clearing and settlement
• Physical versus financial risk (Location risk, Time risk, Quality risk, Political risk)
Financial trading, derivatives & market impact
• Futures and forward curve risk
• Remote hedges in correlatedmarkets
• Spark, Dark spreads etc. gross processing margin spreads
EXERCISE: Spark & Dark Spreads, optimization and associated risks
• Swaps
EXERCISE: Gas swap
• Options (conditional products)
• Risk parameters (Greeks)
SIMULATION: Options risk management – Managing
Greek variables
• Weather, freight and emission products
• Trading and hedging strategies
• Clearing, settlement and margin requirements
More risk issues
• Listed versus bilateral (OTC)
• Portfolio management and
balancing regime
• Prop trading, arbitrage and market risk
• Marking-to-Market valuation, allocation, compliance & regulations (IAS39)
• Dynamic hedging or accepting and limiting risk
• Trade management and psychology of trading
• Contract management (EFET, ISDA)
• Order flow and straight through processing
CASE: Trading screen – Trayport, credit lines, sleeving & masters
Quantifying (market) risk
• Regulations (top down)
• Stress testing (CvaR, Event risk, Subjective approaches)
• Skew, kurtosis and black swans
• Non-financial risk and incompletemarkets
• Financial Risk & loss
• (Log)normal distribution and standard deviation
• Value-at-Risk concept (bottom up) (Variationco-variation method, Historical method,
Monte Carlo method,Why use
VaR and why not)
EXERCISE: Value at Risk calculations in Excel (Variance/ Covariance & Monte Carlo)
Risk management and the organization
• Structure of risk management in the organization
• Policies and procedures around market risk, credit risk and operational risk
• Risk management systems