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Energy Risk Modelling June 2024

This popular two-day in-depth workshop is dedicated for risk management professionals, analysts and traders wanting to gain insights into risk modelling of energy markets.

Learn how to measure and model risk in energy portfolios

More volatile energy markets, combined with complex trading and hedging portfolios have increased the need for measuring risk of individual contracts and whole portfolios, as well as at corporate level (Enterprise risk management).  Furthermore, understanding the dynamics and determinants of volatility, correlation and risk (value at risk and expected shortfall) in energy markets is essential.

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Day 1

09:00- 09:15 Welcome and introduction by Morten Hegna, Sjur Westgaard and Morten Risstad

09:15-10:00 Introduction to energy markets. Risk and return characteristics of energy futures and spot markets.

10:15-11:00 Risk measures: Volatility and Correlation, Value at Risk (VaR), Expected Shortfall (ES).

Empirical risk characteristics of electricity spot and futures markets. Risk characteristics in energy calendar spreads and energy cross commodity spreads.

11:15-12:00 How to model and predict electricity price distributions and risk using quantile regression with fundamental supply and demand factors.

How fundamentals like fuel prices, forecast of demand and supply, wind and solar influence the price risk.

12:00-13:15 Lunch

13:15-14:00 Modeling volatility and correlation in energy markets. Moving average models for volatility and correlation.

Uni- and multivariate GARCH models. Models based on intra-daily data. Models based on implied volatility.

15:15-16:00 Case studies recent trading losses in oil, natural gas and electricity futures and option markets

(China Aviation Oil, Amaranth, Bank of Montreal, Optionsellers.Com)

Day 2

09:00-09:15 Recap from day 1

09:15-10:00 VaR and ES models for energy commodity portfolios

Risk Metrics, Filtered Historical Simulation, Cornish Fisher Approximations, Extreme Value Theory, and Quantile Regression.

10:15-11:00 Backtesting of VaR and ES models.

Stress testing and scenario analysis.

11:15-12:00 Modelling energy forward curves using Principal Component Analysis (PCA).

Modelling and forecasting energy portfolio risk using PCA and quantile regression.

12:00-13:15 Lunch

13:15-14:00 Enterprise Risk Management (ERM) for energy companies

Investigate how relevant risk factors (volume, prices, exchange rates, interest rates and credit spreads) in combination influence the distribution of future cash flows. Analyze the risk reducing impact of alternative hedging

14:15-15:00 Counterparty credit risk and costs of capital (xVA) for financial derivatives

15:15-16:00 Modelling risk with complex underlying risk factors

Case study: Cash flow at risk for a wind power producer. Using copulas with different distributions for prices and wind production,  assymetric tail behaviour and complex non-linear dependency.

16:00-16:15 Discussions and conclusions from the course

Speakers

Sjur Westgaard

MSc and Phd of Industrial Economics from Norwegian University of Science and Technology and a MSc of Finance from Norwegian School of Business and Economics

Professor Westgaard has previously worked as an investment portfolio manager for an insurance company, a project manager for a consultant company and as a credit analyst for an international bank. Currently he is professor at the Norwegian University of Science and Technology and an Adjunct Professor at the Norwegian University of Life Sciences – Center for Commodity Market Analysis.

His teaching involves corporate finance, derivatives and real options, empirical finance and financial risk management. He is one of the founders and editors of Journal of Commodity Markets. He is also an associate editor of Journal of Energy Markets and Journal of Banking and Finance. His main research interest include risk modelling of energy markets. He has recently also been a project manager for two energy research projects involving the research counsil of Norway, power companies, and academic institutions in Europe.

Morten Risstad

Associate Professor Department of Industrial Economics and Technology Management Norwegian University of Science and Technology