Oil Trading: Price Risk, Hedging, Derivatives

Module 1: OPTIONS AND HEDGING
*08:00 -10:15 (with 15 min break)

After a quick review of the basic derivatives (futures, swaps and forwards) we will explain options:
1) How does an option work, and how is it valued?
2) What is a call?
3) What is a put?

Options can be daunting because of the math and the vocabulary. This module will present options as simply as possible, avoiding complex math and explaining the jargon in layman’s terms.
We will look at how options can be a trading tool and a hedging mechanism.

This module will focus on client-based options for producers and consumers.
Finally, we will discuss exotic options; what are they and why are they “exotic”?

Key elements:
– Calls and puts
– European, American and Asian options
– Black-Scholes option pricing model
– Volatility: historical, actual and implied
– Caps and floors
– Collars, spreads, three-ways, and leveraged options
– Exotic options
**30 min break

Module 2: HEDGING, PRICING AND RISK MANAGEMENT WORKSHOP
*10:45 – 13:00 (with 15 min break)

The previous 3 modules built the bases for understanding and managing risk. This final module uses realistic scenarios and simulations for applying this understanding. We will work together to solve hedging and pricing problems on crude oil and products. The exercises will include the use of swaps and futures to calculate prices and hedge price risk.

The number and difficulty of the exercises will depend on the participants. The module will last 2 hours including time for questions.

Exercises (possible):
– Calculating cargo values using swaps: Gasoil from Jamnagar (India)
– Calculating delivered prices and making trading decisions: Jamnagar to West Africa
– Trading gasoil with an EFP: risks and hedging: Gasoil FOB Ventspils (Latvia in Baltics)
– Differential swaps: Jet Diff and Diesel Diffs in Europe
– Differential Risk, Arbitrage and EFP: Trading Jet from Kuwait to Rotterdam
– Gasoline Arbitrage: Europe vs. US market

***The class is interactive and live. Questions are welcomed throughout and web-based whiteboards will be used to demonstrate where required. Time may be allocated for examples suggested by participants in addition to prepared exercises.