Embed Size (px)
Citation preview
1
Trading and Risk Management in Energy Markets
High Level Overview26 June 2014
Ilker Kurt, Head of Group Financial RiskCentrica plc
2
Agenda
• Natural Gas Trading – Value Chain
• Forward curves
• Trading Products
• Main Trading Risks and Risk Trade Off
• Risk Measurement
• Risk Management
3
Natural Gas Trading - Value Chain
• Trading purpose can be optimisation or speculation and it takes place in;
• Spot markets: trading for today (within day) or day ahead• Forward markets: short to medium trading (~ 3 years in the UK)• OTC/Bi-lateral: mid to long term
Risk Management is an integral part of the decision making in the value chain
End UsersProducers, Pipelines,
LDCs
- Brokers (Spectron, Prebon, ICAP)- Exchanges (APX,ICE)- Price reporters (Argus, Platts, ICIS Heren)
4
Forward curves
• Forward curve is the current market view of prices for delivery periods in the future.
• Spot/Forward curve models are widely used;
• Single factor• Multi factor• Path dependant• Jump diffusion
• One absolute truth about modelled forward curves is that they are always wrong.
Sim
ulated
Valu
es
Time
Po
rtfo
lio V
alu
e
Known Current Value
Gas UK
01/06/2008 18/12/2008 06/07/2009 22/01/2010 10/08/2010 26/02/2011
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1 0
£
5
Trading products
• OTC/Bi-lateral contracts/forwards• Can be physically or financially settled. (UK- physical)• Buy/Sell Natural gas at an agreed price (fixed or formula)• Agreement between two counterparties• Delivered (if physical) over a time horizon in the future• Payment after delivery (typically 30 days)• Governed mainly by EFET, ISDA along with NBP which acts as a
framework agreement. • Futures
• Special type of forward contract• Highly standardised contract terms (ie delivery, grade, volume, etc)• Traded on exchanges• Typically settles financially (EFP is physical).
6
Commodity Price Risk
Liquidity Risk Credit Risk
Bilateral margining,
other collateral
Margined exchange-
cleared tradingOTC/Bilateral
trading
Counterparty risk appears in OTC trading, represents a loss due to movement in market prices in the event of default by counterparty
Liquidity risk is the risk of unexpected cash outflow that cannot be met when they fall due.
Liquidity risk may materialize after margin calls based on excessive mark-to-market losses
Market risk is the risk that the portfolio value decreases due to movements in energy prices and exchange rates
Main Trading Risks and Risk Trade Off
7
Other risks
• Market Liquidity risk
• Inability to trade volumes in required time frame
• Limited market depth where placing a trade can move the market
• Limited number of high quality counterparties
• Regulatory/Political Risk
• Changes to the market rules
• Impact of regulation (EMIR, MiFiT, etc)
• Imbalance price changes
• Price caps, floors etc.
8
Risk Measurement
• Various tools and concepts are used to measure different types of risks;
• Price Risk – Value At Risk (VaR), CFaR, PaR• i.e. One day 95% VaR of £5m means that we would not expect our loss on the portfolio, over a 1 day period, to exceed £ 5m more then 5% of the time, or 1 in 20independent one day period
• Credit Risk – Potential future exposure (PFE), CVaR
• Liquidity Risk – Contingent Capital, Margin At Risk
• Model Risk - don’t fall in love with your models !
Portfolio Value (£m)
Pro
bab
ilit
y
10 15 20 25 30
£ 5 m
9
Risk Management
• Typical Risk Management concepts are:
• Price Risk – Hedging, Derivatives
• Credit Risk – Collateral, Credit default swaps (CDS), netting,
contractual clauses (ie MAC), insurance
• Liquidity Risk – Contingent Capital
• Risk is an integral part of decision making within the Energy Industry
• Best practice methodologies and techniques help decision makers to balance risk/return and therefore yield greater earnings certainty and shareholder value
