Platts 3rd Annual European Crude Oil Markets Keynote by Eldon Klaassen
- 1. Optimizing market data to manage risk in
crude oil markets
Eldon Klaassen
CEO
www.allegrodev.com
Risk Management
Commodity Trading
Physical Logistics
Regulatory Compliance
www.allegrodev.com
© 2010 Allegro Development Corporation. All rights reserved. All trademarks and copyrights are the property of the respective owners. All Allegro information, images
6/10/2010 and graphics are the property of Allegro. This material cannot be duplicated or distributed without express written permission of Allegro Development Corporation.
- 2. Allegro Development Corporation
Allegro delivers the industry’s leading multi-
commodity trading and risk management
software.
» 2009 Energy Risk “Software House of the
Year Award”
» 2008 Energy Business Awards “Gold Award Petroleum Coal
for Excellence in Energy Technology”
» Serving more than 100 global customers for Power Natural Gas
over 26 years
» Office locations in London, Zurich,
Singapore, Calgary, Houston, & Dallas
www.allegrodev.com
© 2010 Allegro Development Corporation. All rights reserved. All trademarks and copyrights are the property of the respective owners. All Allegro information, images
6/10/2010 and graphics are the property of Allegro. This material cannot be duplicated or distributed without express written permission of Allegro Development Corporation.
- 3. Optimizing market data
Efficient capture and validation of data
Forward curves, volatility, and
correlations
Market metrics and attribution
Market, basis, credit, and liquidity risk
www.allegrodev.com
© 2010 Allegro Development Corporation. All rights reserved. All trademarks and copyrights are the property of the respective owners. All Allegro information, images
6/10/2010 and graphics are the property of Allegro. This material cannot be duplicated or distributed without express written permission of Allegro Development Corporation.
- 4. Market data sources
External
Data Sources Internal
» Spot prices Data Sources
» Exchange prices » Trader observations
» Broker quotes Trading & Risk » Production costs
» Currency exchange Management System » Refinery spreads
» Interest rates » Credit history
» Credit ratings
» Tariffs
» Freight
www.allegrodev.com
© 2010 Allegro Development Corporation. All rights reserved. All trademarks and copyrights are the property of the respective owners. All Allegro information, images
6/10/2010 and graphics are the property of Allegro. This material cannot be duplicated or distributed without express written permission of Allegro Development Corporation.
- 5. Automated data validation
Validation rules Correction procedures
» Omission » Notifications
» Source variance » Manual corrections
» Time horizon variance » Automated corrections
» Basis variance
90.00
85.00
80.00
75.00
70.00
65.00
4-Jan-10
6-Jan-10
8-Jan-10
10-Jan-10
12-Jan-10
14-Jan-10
16-Jan-10
18-Jan-10
20-Jan-10
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24-Jan-10
26-Jan-10
28-Jan-10
30-Jan-10
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23-Feb-10
25-Feb-10
Plt Dated Brent Plt Dubai 1st Mth Plt Ekofisk 1st Mth
Plt Forties 1st Mth Plt Gippsland 1st Mth Plt Minas 1st Mth
Plt Oman Blend 1st Mth Plt Oseberg 1st Mth Plt Tapis Blend 1st Mth www.allegrodev.com
© 2010 Allegro Development Corporation. All rights reserved. All trademarks and copyrights are the property of the respective owners. All Allegro information, images
6/10/2010 and graphics are the property of Allegro. This material cannot be duplicated or distributed without express written permission of Allegro Development Corporation.
- 6. Forward curves
Forward curve creation Multiple forward curve analysis
» Current prices for future delivery » Linear, non-linear, step functions
» Basis differentials-net back/net forward » Scope of historical price behavior
» Interpolation/extrapolation » Deviation of forward curve assumptions
» Historical simulation
» Mean reversion rates
89.00
87.00
85.00
83.00 ICE Brent Crude
81.00 DME Oman Crude
79.00 NYMEX WTI Cushing
77.00
75.00
1-Apr-…
1-Apr-…
1-Apr-…
1-Apr-…
1-Apr-…
1-Apr-…
1-Jul-10
1-Jul-11
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1-Oct-10
1-Jan-11
1-Oct-11
1-Jan-12
1-Oct-12
1-Jan-13
1-Oct-13
1-Jan-14
1-Oct-14
1-Jan-15
1-Oct-15
www.allegrodev.com
© 2010 Allegro Development Corporation. All rights reserved. All trademarks and copyrights are the property of the respective owners. All Allegro information, images
6/10/2010 and graphics are the property of Allegro. This material cannot be duplicated or distributed without express written permission of Allegro Development Corporation.
- 7. Volatility and correlation
Volatility
» Volatility indexes—logical groupings
» Historical volatility, implied volatility
» Volatility smiles, skew
Correlations
» Historical correlation
» Seasonal effects
» Liquidity effects
www.allegrodev.com
© 2010 Allegro Development Corporation. All rights reserved. All trademarks and copyrights are the property of the respective owners. All Allegro information, images
and graphics are the property of Allegro. This material cannot be duplicated or distributed without express written permission of Allegro Development Corporation.
- 8. Market metrics
Linear positions
» Simple market valuation and mark to market
Non-linear positions: What is an option worth?
» Option models
• Differential equation approach (Black-Scholes)
• Stochastic calculus approach
» Option valuation methodology
• Single model for all instruments
• Model values complex physical options with all of the
necessary constraints
Option valuation
» Time value, intrinsic value
Sensitivities
» Delta, gamma, theta, vega, rho
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© 2010 Allegro Development Corporation. All rights reserved. All trademarks and copyrights are the property of the respective owners. All Allegro information, images
and graphics are the property of Allegro. This material cannot be duplicated or distributed without express written permission of Allegro Development Corporation.
- 9. Option Valuation: Financial Options
Exchange traded options
» NYMEX, ICE, DME
OTC Financial options
» Market price options
» Spread options
» Multiple asset options
» Strips of options
» Lookback options
» Calendar spreads
» Compound options
www.allegrodev.com
© 2010 Allegro Development Corporation. All rights reserved. All trademarks and copyrights are the property of the respective owners. All Allegro information, images
and graphics are the property of Allegro. This material cannot be duplicated or distributed without express written permission of Allegro Development Corporation.
- 10. Option Valuation: Physical Options
Pricing
» Floors and caps
» Price triggers
Logistics
» Vessel loading tolerance
» Take or pay contracts
» Time charters
Inventory and storage
» Crude oil injection and withdrawal
www.allegrodev.com
© 2010 Allegro Development Corporation. All rights reserved. All trademarks and copyrights are the property of the respective owners. All Allegro information, images
and graphics are the property of Allegro. This material cannot be duplicated or distributed without express written permission of Allegro Development Corporation.
- 11. Option Valuation: Exercise & Constraints
Physical options tend to have complex exercise
» Frequency of exercise
» Number of exercises
» Quantity of exercise
Physical options tend to have constraints
» Physical limitations
» Minimum and maximum operational quantities
» Contractual limits
www.allegrodev.com
© 2010 Allegro Development Corporation. All rights reserved. All trademarks and copyrights are the property of the respective owners. All Allegro information, images
and graphics are the property of Allegro. This material cannot be duplicated or distributed without express written permission of Allegro Development Corporation.
- 12. Basket Prices
• Brent • Mars • Minas
• Forties • Poseidon • Tapis
• Oseberg • Southern Green • Gippsland
• Ekofisk Canyon • Dubai
• Thunder Horse • Oman
BFOE ACM ICP
www.allegrodev.com
© 2010 Allegro Development Corporation. All rights reserved. All trademarks and copyrights are the property of the respective owners. All Allegro information, images
6/10/2010 and graphics are the property of Allegro. This material cannot be duplicated or distributed without express written permission of Allegro Development Corporation.
- 13. Option Analytics: Basket Options
Variants of basket options
» Simple or weighted average
» Average price over time period (Asian)
» Spread options
Modeling distribution of sum of lognormal random variables
» Black Scholes assumes lognormal distribution
» Sum of lognormal variables does not follow lognormal distribution
Moment matching
» Basket treated as a single underlying commodity
dB(t) = (r – qB) B(t)dt + sB B(t)dzB
» Moment matching approach to determination of basket volatility
» Estimation of correlation coefficients
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© 2010 Allegro Development Corporation. All rights reserved. All trademarks and copyrights are the property of the respective owners. All Allegro information, images
6/10/2010 and graphics are the property of Allegro. This material cannot be duplicated or distributed without express written permission of Allegro Development Corporation.
- 14. Option Analytics: Differential Swaptions
Options on swaps for differential
» Crude differential
» Location differential
» Calendar differential
Valuation challenge
» Simple spread assumes available volatility and correlation to delivery date
» Differential swaption volatility is a function to expiration date
» Spread is not log normally distributed
Tree transformation
» Transformation of variables from underlying to variables with no correlation
» Construct two independent trees in these new variables
» Use the inverse transformation for a three-dimensional tree for the swaps
forward
www.allegrodev.com
© 2010 Allegro Development Corporation. All rights reserved. All trademarks and copyrights are the property of the respective owners. All Allegro information, images
6/10/2010 and graphics are the property of Allegro. This material cannot be duplicated or distributed without express written permission of Allegro Development Corporation.
- 15. Profit and Loss Attribution
Trans Quan Price Delta Gamma Theta Vega Rho Profit(Loss)
Brent (206,605) (64,751) (615,821) (248,441) (125,981) (49,443) (217,826) (1,883) (1,530,750)
Dubai 392,237 31,758 568,518 210,678 91,398 16,848 180,858 (1,297) 1,491,000
Ekofisk 126,705 70,102 577,882 239,362 126,522 55,997 211,152 2,779 1,410,500
Forties (254,283) (79,693) (757,933) (305,773) (155,053) (60,853) (268,093) (2,317) (1,884,000)
Gippsland (82,424) (94,949) (701,009) (296,969) (162,289) (78,114) (263,299) (4,444) (1,683,500)
Minas 57,411 130,748 913,928 391,808 217,768 108,993 348,298 6,548 2,175,500
Oman (362,301) (38,405) (584,885) (220,565) (99,125) (23,225) (190,205) 713 (1,518,000)
Oseberg 118,723 79,067 629,633 262,589 140,241 63,774 232,002 3,319 1,529,350
Tapis 36,363 102,951 711,531 305,811 170,571 86,046 272,001 5,224 1,690,500
WTI 91,466 59,740 477,340 198,940 106,140 48,140 175,740 2,494 1,160,000
Totals (82,708) 196,568 1,219,184 537,440 310,192 168,162 480,628 11,135 2,840,600
www.allegrodev.com
© 2010 Allegro Development Corporation. All rights reserved. All trademarks and copyrights are the property of the respective owners. All Allegro information, images
6/10/2010 and graphics are the property of Allegro. This material cannot be duplicated or distributed without express written permission of Allegro Development Corporation.
- 16. Profit and Loss Attribution
2,500,000
2,000,000
1,500,000
1,000,000
500,000
-
(500,000)
(1,000,000)
(1,500,000)
(2,000,000)
(2,500,000)
Trans Quan Price Delta Gamma Theta Vega Rho
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© 2010 Allegro Development Corporation. All rights reserved. All trademarks and copyrights are the property of the respective owners. All Allegro information, images
6/10/2010 and graphics are the property of Allegro. This material cannot be duplicated or distributed without express written permission of Allegro Development Corporation.
- 17. Market and basis risk
Exposure disaggregation Value at risk
Mark to market
25.000
20.000 WTI
Tapis
15.000 Oseberg
Oman
Minas
10.000
Gippsland
Forties
5.000
Ekofisk
Dubai
- Brent
www.allegrodev.com
© 2010 Allegro Development Corporation. All rights reserved. All trademarks and copyrights are the property of the respective owners. All Allegro information, images
6/10/2010 and graphics are the property of Allegro. This material cannot be duplicated or distributed without express written permission of Allegro Development Corporation.
- 18. Liquidity risk
Cash flow disaggregation Cash flow at risk
Margin requirements
400.0
300.0
200.0
100.0
Margin disbursements
-
Margin receipts
(100.0)
Cash disbursements
(200.0) Cash receipts
(300.0)
(400.0)
www.allegrodev.com
© 2010 Allegro Development Corporation. All rights reserved. All trademarks and copyrights are the property of the respective owners. All Allegro information, images
6/10/2010 and graphics are the property of Allegro. This material cannot be duplicated or distributed without express written permission of Allegro Development Corporation.
- 19. Simulation
What if market variables change?
» Quantity
» Price
» Basis
» Volatility
» Correlation
» Currency
» Transactions
How will they change?
» Linear shift
» Parallel/rotational shift
» Absolute/relative shift
» Stochastic shift
www.allegrodev.com
© 2010 Allegro Development Corporation. All rights reserved. All trademarks and copyrights are the property of the respective owners. All Allegro information, images
and graphics are the property of Allegro. This material cannot be duplicated or distributed without express written permission of Allegro Development Corporation.
- 20. Optimizing market data
Efficient capture and validation of data
Forward curves, volatility, and
correlations
Market metrics and attribution
Market, basis, credit, and liquidity risk
www.allegrodev.com
© 2010 Allegro Development Corporation. All rights reserved. All trademarks and copyrights are the property of the respective owners. All Allegro information, images
6/10/2010 and graphics are the property of Allegro. This material cannot be duplicated or distributed without express written permission of Allegro Development Corporation.
- 21. Optimizing market data to manage risk in
crude oil markets
Eldon Klaassen
CEO
www.allegrodev.com
Risk Management
Commodity Trading
Physical Logistics
Regulatory Compliance
www.allegrodev.com
© 2010 Allegro Development Corporation. All rights reserved. All trademarks and copyrights are the property of the respective owners. All Allegro information, images
6/10/2010 and graphics are the property of Allegro. This material cannot be duplicated or distributed without express written permission of Allegro Development Corporation.