Course description
This is a course on practical risk management for energy market participants. The focus of the course is on decision making under uncertainty in the presence of fat tails and Black Swans with emphasis on events in energy markets such as extreme market moves and structural market changes.
Multiple case studies from energy markets, with particular emphasis on recent events as a result of Covid-19 will illustrate the main concepts presented in the seminar.
We will discuss hedging, trading and risk measurement for energy portfolios in the context of fat tails and Black Swans. We will introduce the concept of fragility in the context of energy market exposures and explore different techniques to make a portfolio robust against extreme market changes. Various case studies will explore successful applications as well as risk management failures and lessons learned.
Knowledge of energy markets and basic statistics such as normal distributions and standard deviation (volatility) and market risk models such as Value at Risk required. Delegates are also expected to be familiar with trading and hedging instruments such as Futures, Swaps and Options as well as option Greeks such as delta and gamma.
This virtual solution is comprised of three live instructor-led sessions hosted on state-of-the-art training software with video, audio, chat, live polls, competitive quizzes, breakout sessions and much more! See recorded demonstrations here. Before each session, delegates will be expected to prepare by reading a series of articles and case studies.
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Content
Virtual Instructor-Led Session 1: 10 June 2020 at 10:00AM - 12:30PM EST (New York)
Risk Taking and Risk Management in Practice
- Who manages risk?: The difference between risk management decisions and risk "analysis"
- Article discussion: The Six Mistakes Executives Make in Risk Management
- The two questions that all risk managers should ask (and answer)
- Why ruin and variations are different animals
- Risk Management in business and in personal life
- Predictable Surprises and Risk Management
- Case study: How to prepare against something that has not yet happened?
- Normal portfolio variations vs. risk of ruin
- How do energy traders tend to blow up? Why does it keeps happening?
Fat tails and Black Swans
- What are Fat Tails? Where can we identify them?
- Statistics and heavy tails. Standard deviation vs mean absolute deviation
- Extremistan vs. Mediocristan: Higher dimensions and fat tails
- Linear regression, correlation and fat tails
- What are Black Swans? – Was COVID-19 a Black Swan?
- How to live in a world with Black Swans
- Asymmetry and fat tails in decision making: When the cost of being wrong trumps the benefits of being right
Virtual Instructor-Led Session 2: 17 June 2020 at 10:00AM - 12:30PM EST (New York)
Fragility/Antifragility and Hedging
- How can we identify fragility of market exposures?
- Fragility/Antifragility: Examples from finance and energy markets
- Implications of convexity to errors
- Case study: COVID-19: Risk asymmetry of wearing a protective mask
- The notion of negative (and positive) optionality
- Review of option Greeks and non-linearities of portfolios
- Case study: Hedging with futures/swaps vs. option instruments
- Case study: Optionsellers.com and failure to understand fat tails in natural gas markets
- Path dependence, drawdown and fragility
Data Analysis and the limits of evidence-based risk management
- What are limits of statistical methods?
- The problem with evidence-based risk management in energy trading
- Understanding the difference between absence of evidence vs. evidence of absence
- Ergodic vs. Non-Ergodic processes
- Geometric Brownian Motion (GBM), Mean Reversion and Jump models
- Structural change: Examples from power, gas and oil markets
- Common ‘fallacies” when using historical data to make risk projections: The causality fallacy and applications to hedging
- Behavioural finance and the psychology of risk taking
- Overconfidence, Loss Aversion and Information biases
- Psychological mistakes with model error
- Why people often focus on the wrong risks
- What wrong with the excuse “no one could predict this”?
Virtual Instructor-Led Session 3: 24 June 2020 at 10:00AM - 12:30PM EST (New York)
Portfolio Risk Management Decisions and Model Risk
- What is wrong with traditional risk assessment methods: Standard Deviations, Correlations and VaR methodologies
- Moral hazard, risk limits and market risk models
- Article discussion: How to game risk models
- Portfolio selection and construction:
- Diversification and portfolio constraints under extreme events
- Building portfolio resiliency
- Optimization and potential vulnerabilities
- Extreme value theory (EVT)
- Uses and benefits
- Domains where useful
- Coherent and Spectral Risk Measures: Uses in insurance and risk management
- Stress Tests and EVT
- Model risk management:
- Asymmetry of model errors
- Uncertainty on risk model parameters (e.g. volumetric uncertainty, correlations, tail thickness)
- Optionality and non-linearities
- Hidden optionality in long term contracts
Risk Assessment and Management in the presence of Extreme Market Movements
- Finance vs Insurance
- Insurance, law and heuristics
- When is the right time to buy insurance?
- Options as Insurance
- Case study: Oil market dynamics in March 2020 as a response of global COVID-19 pandemic
- Analysis of Mexico’s oil hedging programme with Asian put options
- When hedging backfires: Hedging by airlines in Q1 2020
- The misuse of 3-way collars by oil producers
- Calpers attempt to time portfolio hedges
- How to prepare for market panics
- Portfolio liquidity: Squeezes, fungibility and transaction costs.
- Case study: Why did NYMEX WTI May 2020 Contract settle at a large negative price?
- Hidden risks and portfolio vulnerability assessments