Real Options - Intrinsic and Extrinsic Value Concepts. Carlos Blanco and Christopher Mammarelli. Energy Metro Desk - January 2016
The term "real options" in the context of energy markets refers to all the potentially valuable flexibilities associated with the management of physical assets and third-party contracts. As with standard financial options, the value of a real option can be decomposed into two components: intrinsic value and extrinsic value.
An overview of physical assets and long term contracts as real options. Carlos Blanco and Christopher Mammarelli. Energy Metro Desk - January 2016
Many of the key drivers of profitability at energy firms – such as outright commodity prices, refining margins, power generation spark spreads, and inter-market price spreads - are external factors that are beyond the influence of their managers. However, the day to day operating decisions involving oil and gas storage facilities, pipelines, transmission networks, marine vessels, petroleum refineries, and power plants provide these managers with very controllable opportunities to create (or to destroy) significant shareholder value.
Counterparty Risk Exposure Metrics. Blanco, C. May Energy Risk. 2015
In this article, we discuss the main risk metrics used to measure and manage counterparty risk, including current exposure, potential future exposure (PFE) and counterparty valuation adjustments (CVA)
In this article, we present a few lessons from the recent collapse of oil prices that may help some E&P companies
make better hedging decisions and avoid common mistakes.
Building a better LNG forward curve. Energy Risk. Quant Ideas. March. Tamir Druz and Carlos Blanco
A robust suite of liquefied natural gas (LNG) forward curves is an important prerequisite for the proper valuation and risk measurement of LNG portfolios. This article provides an overview of effective methods for constructing long-term LNG forward price curves, along with in-depth guidance and illustrative results for a proxy-based approach
Risk Management in 2015, Energy Metro Desk, End of Year Issue. Carlos Blanco
This article looks at the post-financial crisis, post Dodd-Frank implementation energy sector and argues that energy risk management is at a crossroads. The risk groups inside energy companies are transforming yet again, and their ultimate roles will be determined by four main trends in 2015 and beyond.
Actively managing risk culture in energy firms: part two. Energy Risk, December 2014. Carlos Blanco, Jean Hinrichs and Robert Mark.
Cultural failings have played a critical role in many well-publicised energy risk management failures, but risk culture is challenging to monitor and assess. In the second part of this series, we propose a solution In our first article on creating a risk culture framework, we defined risk culture as the values and norms of behaviour related to managing risk in an organisation.
ETRM Systems in today's market environment, Oil and Gas Finance Journal, October 2014. Carlos Blanco
ETRM systems for energy and commodity portfolios still fall short in prescriptive analytics. This article discusses some of the key areas where ETRM systems can improve their capabilities to assist with the optimization of physical and financial portfolios.
Actively managing risk culture in energy firms: part one. Energy Risk, July 2014. Carlos Blanco, Jean Hinrichs and Robert Mark.
Risk culture lies at the root of many of the most publicised energy risk management failures. In recent years, interest in the risk culture of organisations has increased dramatically. In this article, we explore how energy firms can define, assess, benchmark and actively manage risk culture.
Hedging, Risk Management and Valuation of Long-Term Oil-Indexed LNG Supply Contracts. Commodities Now, March 2014. Tamir Druz and Carlos Blanco.
In this article we explore the use of oil-index formulas in forward curves used for valuation of gas and LNG portfolios worldwide and discuss alternative hedging approaches2013
Optimising commodity hedging programmes Carlos Blanco and Tamir Druz. Energy Risk. July-August 2013The design and optimisation of a successful commodity hedging programme requires solid backtesting that meets the needs of different business functions. Using a recent case study, Carlos Blanco and Tamir Druz show how various tests can complement and reinforce one anotherConservative vs. Speculative 3-Way Collars for Producers. Carlos Blanco, NQuantX. Energy Derivatives Risk Management Series. Commodities Now. June 2013
An Integrated Approach to Commodity and FX Hedging: Michelin Case Study. Tamir Druz and Carlos Blanco. Commodities Now, December 2013.
In this article, we introduce an integrated approach to hedging for multinational firms with exposures to commodity price and exchange rate fluctuations. Based on our experience, we have identified a series of key parameters that determine the effectiveness of a hedging program. A case study built using Michelin publicly available financial information illustrates the benefits of an integrated hedging program for commodity and foreign exchange risk.
As price volatility returns to natural gas and power markets in North America, producers are starting to ramp-up their hedging programmes. Some of the most widely used option structures are 2-way, 3-way and 4-way collars. In this piece, we will discuss 3-way collars, an extension of a standard collar, but with a third element that can transform a relatively simple hedge structure into a considerably riskier or more conservative one.Venturing Beyond Historical Simulation VaR: Blanco, C. and J.R. Aragones. Energy Risk. May 2013In this article, Carlos Blanco and José Ramón Aragonés review the historical simulation methodology used to estimate value-at-risk and expected tail loss, while including adjustments to traditional assumptions that can help improve risk forecasts for energy and commodities portfolios
Pre-trade Risk Analytics: Implied Risk Views, Trade Risk Profiles and Best Hedge Reports. Carlos Blanco, Managing Director, NQuantX. Commodities Now. March 2013
In this piece, we illustrate the use of portfolio implied risk views, trade risk profiles and best hedge metrics to assist traders to manage the risk in their books. Many energy trading organizations use VaR limits as the primary market risk control metric. However, once traders approach their VaR limits, they are often left to their own devices to manage the risk oftheir positions. Because of the sometimes complex interactions between the portfolio constituents, traders that do not have access to the right analytical support are operating in the darkness when attempting to identify the likely impact on a new trade in the portfolio VaR.Valuation and Hedging of OTC Energy and Commodity Swaps: Blanco, C. and Pierce, M. Energy Risk. February 2013In this article, Carlos Blanco and Michael Pierce provide an overview of swap instruments and discuss the pricing, valuation, hedging and risk management of over-the-counter commodity swaps. They also comment on the expected ramifications of new regulations for end-users and swap dealers2012
Credit Valuation Adjustment for Energy and Commodity Derivatives (II).Carlos Blanco and Michael Pierce. Energy Risk. November 2012Credit Valuation Adjustment for Energy and Commodity Derivatives (I).Carlos Blanco and Michael Pierce. Energy Risk. October 2012Modelling Energy Spreads in Energy Markets: Implications for Risk Management and Valuation of Spread Options. Carlos Blanco and Michael Pierce. Energy Risk. August 2012IFRS 9: Hedge Effectiveness and Optimal Hedge Ratios. Carlos Blanco and Michael Pierce. Energy Risk. June 2012Joint Simulation of Spot Prices and Forward Curves. Carlos Blanco and Michael Pierce. Energy Risk. May 2012Multi-factor Forward curve models for Energy Risk management. Carlos Blanco and Michael Pierce. Energy Risk. April 2012Spot Price Process for Energy Risk management. Carlos Blanco and Michael Pierce. Energy Risk. March 20122011
What went wrong at MF Global. Commodities Now. December 2011Unprecedented events and stress tests. Carlos Blanco, Commodities Now2010
Integrated Risk Modelling for Trading & Hedging Decisions By Carlos Blanco & Michael Pierce; NQuantx. WorldPower 2010Turning Quantitative Models & Systems for physical and derivatives portfolios in energy and commodity markets into Decision-Support Tools. This article explores some of the benefits of having a shared risk information environment to support trading, valuation, hedging, and risk management decisions. The risk technology and models used by most Energy Trading and Risk Management Systems (ETRM) is years behind from the state of the practice in financial institutions. There are multiple reasons for this system sub-performance.Colateral, Cash Flow & Earnings at Risk: Time to update your risk metrics and policies? Carlos Blanco. WorldPower 2010This article provides an overview of risk metrics that can help trading and marketing groups, as well as the CFO and treasury departments, gain insights into the potential variability of collateral, cash flow and earnings.Risk Governance & Stress Tests: A risk governance model By Carlos Blanco & José Ramón Aragonés. Commodities Now. September 2010Financial regulators worldwide have largely operated under the dubious assumption that the internal risk management processes at most financial and trading firms was effective and there was little need for micro-management.In this article, we argue that for the risk management process to be effective, a firm needs to have an explicit ‘risk governance’ framework in place that integrates risk management into the governance structure of the firms, and coherently links the roles and responsibilities of the risk group with the overall business strategy of the firm.Credit Valuation Adjustment: Credit Risk Comes to the Forefront of Derivative Contract Valuations. Carlos Blanco. Commodities Now. December 2010Until recently, counterparty risk management played a secondary role in the valuation and risk measurement of energy and commodity portfolios. The financial crisis, changes in accounting standards (FASB 157 in the USA, and IAS 39 elsewhere), as well as significant advances in credit risk measurement technology have led to an increased focus on improving counterparty risk management practices at energy and commodity firms.