Risk Management for Commodities Workshop

2 DAY SPECIALTY COURSE

Excel Focused Technical Skill Development

Qualifies for CPD and 14 CPE Credits

For this intensive and highly interactive course, all delegates are strongly recommended to attend the workshop with a laptop computer loaded with Microsoft Excel.

INTRODUCTION

In recent years, commodities have emerged as an asset class of their own right. Investments in various commodity related ventures, such as ethanol production, are driven by fundamental shifts in the global markets. Various institutions ranging from hedge funds to university endowments have successfully invested in commodities related investments. The characteristics of physical commodities markets are fundamentally different from financial markets. Spot and derivatives markets for hard commodities (metals, crude oil, and coal) behave differently from markets for soft commodities (agricultural). These differences are substantial, and their effects on price formation and behavior are complex. Both risk mangers and investment managers need to understand what these differences are and how these differences impact both investment decision-making and effective risk management approaches.

Who should attend?

This intensive and interactive training course is designed for practitioners active in commodities markets. As its primary objective, the course aims to provide a practical understanding of the behavior of commodities markets and the risk management implications of commodities markets.

What will you get out of this course?

• Gain understanding in the unique statistical properties of commodities markets
• Apply complex forward valuation models
• Analyze the impact of fundamental factors on commodity values
• Structure complex derivatives trades for risk management
• Estimate VaR for commodities in a banking book
• Practical demonstrations of the above will be provided throughout the workshop through interactive Excel spreadsheets that the delegates will be able to use after the course.

COURSE OVERVIEW AND OUTLINE

Fundamentals of pricing commodities in practice and theory

• Spot and futures trading
• Storage, inventory, and convenience yield
• Arbitrage pricing
• Commodity price indexes
• Black’s model
• EXERCISE: Statistical features of commodity spot and futures series

Issues with backwardation, contango, stochastic and deterministic basis spreads

• Spot and futures prices – contango and backwardation
• Futures price curves – contango and backwardation
• Basis spreads
• EXERCISE: Modeling stochastic and deterministic basis spreads

Behavior of cyclical commodities

• Metals markets and their features
• Price movements in metal markets
• Using futures to hedge static price risk
• Using complex strategies to hedge dynamic price risk
• EXERCISE: Trading the shape of the forward commodities price curve

Behavior of seasonal commodities

• Agricultural markets – grains and other soft commodities
• Using futures to hedge price risk
• EXERCISE: Commodity quanto options

Behavior of cyclical and seasonal commodities

• Gas and oil markets in a global context
• Physical and financial energy markets
• EXERCISE: Predicting energy demand

Use of complex contracts in the energy sector to manage risk

• Common risk management practices in the energy sector
• EXERCISE: Crack, black, and spark spreads

Measurement issues in commodities price modeling

• Price transparency
• Volatility issues
• Rolling contracts forward
• Creating a maturity consistent futures price series
• EXERCISE: Creating maturity consistent futures prices series

Towards a commodities VaR

• Commodities in the banking book
• Principles of VaR estimation applied to commodities
• EXERCISE: Estimating commodities VaR
• EXERCISE: VaR and capital needs