Day 1
Natural Gas Risk and Forward Prices
Enterprise Risk
• The concept of risk
• Categories of risk faced by energy companies
• Interdependence of risk in the energy enterprise
• Identifying price risks
The Dealing Process
• Bid-offer spreads
• Role of brokers, dealers and market makers
Forward Pricing Concepts
• Arbitrage discipline in forward pricing of commodities
• Understanding why natural gas prices deviate from theory
• Limitations to the ability to arbitrage
• The ‘Fear Factor’: physical (delivery) risk
The Forward Price Curve for Natural Gas
• Seasonality
• Synthetic forwards
• Long-term backwardated and contango natural gas curves
• Valuing and marking to market risk position using the forward curve
• Using the forward price curve to develop hedge tactics
• The role of forward prices in capital budgeting
Swap Structures in Natural Gas
The Financially Settled Contract
• The swap structure
• Indifference between Index cash flow and physical natural gas
• Advantages of the swap hedge versus fixed-price physical
• Understanding box and arrow swap hedge diagrams
• Unbundling and separating physical risk from financial risk
• The swap as the collapse of two physical trades
• Calculating the all-in pricing with a swap
• How swaps are quoted
Pricing a Swap
• Creating a fair value exchange
• The role of the forward price curve
• The index price reference
Swing Swaps
• Intra-month swaps referencing Gas Daily prices
• Calculating a Gas Daily Average
• Balance of Month (BOM) swaps
Location Basis and Basis Trading Structures
Understanding Location Basis
• Defining location basis
• Basis as synthetic transportation cost
• Basis risk
Basis Trading Structures
• The basis swap in natural gas
• Pricing basis trades from price curves
• Quoting convention for basis swaps in natural gas
• Basis spreads in natural gas vs. basis swaps
• Quoting basis spreads
• How a basis swap and a basis spread lock in transport cost
Using Basis Swaps to Price Natural Gas
• The basis risk of hedging at the Henry hub
• Using the basis swap to secure a fixed-price for gas
• Benchmark pricing for natural gas
• Adjusting gas prices for non-benchmark gas sales
Using Basis Swaps to Optimize Risk Taking
• Synthetically relocating risk exposures
• Selling Rocky Mountain gas indexed to Appalachian prices
• Multiple fuel basis-like swap structures
• Selling Rocky Mountain gas indexed to MISO power prices
Day 2
Basis Trading & Natural Gas Pipeline Transport
Basis Spreads and Pipeline Transportation
• Cost of moving gas financially
• Understanding pipeline tariffs
• Calculating fuel charges and capacity gross ups
• Total cost of moving gas using the pipeline
• Pipeline capacity as a long basis position
• Pipeline capacity as a long option position
Review of Option Basics
• Option as payout asymmetries
• Structure and payouts of calls and puts
• Hedging natural gas risk positions with options
• Cost/revenue profiles of risk positions hedged with calls or puts
Options on Basis
• Calls and puts on basis spreads
• Identifying embedded options
• Basis options embedded in supply contracts
• Real options
Pipeline Capacity as Option on Basis
• Pipeline capacity owners have a long call on basis
• Pipeline as a ‘chooser’ option
Swing Swaps and Swing Swap Options on Basis
• Gas Daily swaps
• Gas Daily basis swaps
• Options on Gas Daily basis spreads
Pipeline Segmentation
• Implied transport cost embedded in a price of delivered gas
• Cost minimization using basis swaps
• Choosing between pipeline and basis transport for pipeline segments
• Backhauling as transport arbitrage to reduce transport cost
Time Spread Trading & Storage
Time/Calendar Spreads
• Time spread and seasonal spreads
• Buying and selling a time spread
Storage and Time Spreads
• Storage as a long time spread position
• Time spread as a cost of synthetic storage
• Adjusting for time value of money
• Comparing the cost of storage vs. using time spreads
• Storage as an option on time spreads
Storage Arbitrage
• Arbitrage opportunity because forward gas price is not arbitrage-free
• The cost of storing synthetically
• Packaging synthetic storage
• Synthetic storage as lending
Managing Storage Using Time Spreads
• Using storage to fix a time spread
• Increasing storage margins using time spreads
• Swing swap options as alternative to storage
Short Term Storage Strategies
• “Park-and-Loan” programs
• Intentional imbalance to extract value
Hedging Risk with Natural Gas Futures
The Henry Hub Natural Gas Futures Contract
• Origins of futures exchanges
• The natural gas contract
• Contract specifications
Margining and Credit Risk
• Default risk mitigation
• Original margin
• Maintenance/variation margin
• Exchanging credit risk for cash liquidity risk
• Implications of margins on cost
Using Futures to Hedge
• NYMEX Standard Delivery
• Delivery procedure
• Alternate delivery procedure
• Futures as a ‘paper’ hedge
• Managing cash-futures basis
• NYMEX “Look-Alike” swaps
• Comparing futures against swap hedges
EFP’s and EFS’s
• Exchange of Futures for Physical (EFP)
• Execution risk with futures when dealing away from the Henry Hub
• Pricing and executing an EFP
• Exchange of Futures for Swaps (EFS)
Other Floor Traded Natural Gas Products
• Options
• Strips
Natural Gas On-Line Trading
• Henry Hub swap futures (outrights)
• Henry Hub Penultimate swap futures (outrights)
• Index swap futures
• Basis swap futures
• Swing swap futures
Clearing OTC Transactions
• Managing Over the Counter Credit Risk
Trading Simulation
Understanding Trading Concepts
• The dealing process
• Understanding and working under VaR trading limits
• Factors affecting natural gas prices
• Storage levels
• Weather
• Reading and understanding historic price charts
• Developing trading strategies
• Performance metrics
Trading Game Sessions
