Thomas McNulty leads Navigant's commodity derivatives and hedging practice. He has over 30 years of experience in banking, corporate finance, risk management, and consulting. Navigant provides advisory services related to derivatives hedging strategies, model design, valuation, reporting, and compliance. Services include assessing risks, quantifying exposures, structuring hedges, executing trades, performing valuations, making credit adjustments, and monitoring hedge positions. Navigant uses quantitative modeling techniques like Monte Carlo simulation for assessments and has experience valuing over $9 billion in derivative instruments.

1. Derivatives & Hedging
Advisory Services
May 2015

2. Thomas J. McNulty, FRM
Tom McNulty leads Navigant’s Commodity Derivatives & Hedging Practice from our Houston office. He
began his career with Brown Brothers Harriman & Co. in New York. After completing the Corporate
Finance Analyst Training Program, he was assigned to the Money Desk where he was a Fed Funds and
Eurodollar trader and market maker. Mr. McNulty came to Houston after business school, and served in a
variety of corporate finance, risk management, and treasury roles with Enron International, Duke Energy
International, and Plains All American Pipeline. As an advisor and as a consultant, Mr. McNulty has assisted
roughly two dozen corporate, banking, and private capital firms with the challenges they face in dealing
with complex derivative instruments, including:
Hedge strategy
Model design
Credit Value Adjustments (“CVA”)
Structuring & Execution
Valuation
Compliance-Designation and Documentation
Reporting (ASC 815)
Stress Testing
Novation, Sales, Un-windings and Defaults
Over the course of his career in banking, industry, and consulting, Mr. McNulty has valued several hundred
derivative instruments with notional valuations in excess of $9 billion.

3. Navigant’s Scoping Framework
Ask the Right Questions
1. Identify the risks.
• Commodity price volatility
• Foreign exchange rates
• Interest rate curve duration & convexity
• Credit risk
2. Quantify the risks.
3. Develop and draft a written hedge strategy.
4. What needs to be protected?
• Balance Sheet
• Regulatory Capital
• Income Statement
• Cash Flow
5. Execute trades.
6. Fair Value the derivative instruments.
7. Make the CVAs and document them.
8. Maintain proper compliance protocols.
9. Report properly under ASC 815, 820, and 825, and/or
IFRS 9 and 13.
10. Actively monitor and manage hedge positions.
Use Advanced Analytical Skills
Navigant uses the very latest in rigorous,
Quantitative Finance (“QF”) techniques.
• Monte Carlo Simulation (“MCS”)
• Finite Difference Methods
Make Credit Value Adjustments (“CVA”)
We use all methods to arrive at the best
answer for our Clients, not just the easiest
one.
• Bond spreads
• Credit Default Swap (“CDS”) quotes
• Moody’s/S&P/Fitch ratings
• Numerical methods

4. Derivatives & Hedging I
Initial Work
• Develop and model Client’s hedge strategy.
• Assist with, or do, model design and construction.
• Perform and document Credit Value Adjustments (“CVA”).
• Assist Client with structuring & trade execution, as needed.

5. Derivatives & Hedging II
Ongoing/Recurring Work
• Perform “Day One” or “Time Zero” valuations of hedge portfolio’s
derivative instruments, consistent with applicable standards.
• Provide to, or support Client with, recurring valuations.
• Monthly
• Quarterly
• Annually (not advisable)
• Assist Client with compliance program efforts, especially hedge
designation and documentation.
• Guide Client with SEC, CFTC, IRS, and other reporting
requirements.
• Design and implement a stress testing program.

6. Derivatives & Hedging III
Work at the Back End
Novation
• Navigant can assist Clients with the challenging novation process
in the event of a merger, acquisition, or divestiture.
Sales
• Exit valuations will need to be done-Navigant does this work for
its Clients.
Un-windings
• In order to negotiate un-windings from the best possible position,
simulations need to be run to find the right valuation and stress
points. Navigant will do this for Clients, or at least guide them in
the process.
Defaults
• In the event of defaults, Navigant stands side-by-side with its
Clients to do the analytical support work that must be done in
workouts.

7. Valuation Services I
Fixed-income products
• Fixed and floating rate instruments, bonds, swaps, caps and floors, FRAs and
other delta products.
• Yield, duration and convexity calculations.
• Bootstrapping to build up the yield curve from trading bonds and swaps.
• Curve stripping - Using reference rates & basis spreads, OIS discounting and
dual-curve stripping, cross-currency basis curves, and calculating the cost of
funds.
• Interpolation methods, including piece wise constant forwards, piece wise linear,
cubic splines, smart quadratics, quartics, and monontone convex splines.
• Stochastic interest rate models, one and two factors.
• Model Calibration - Fitting the yield curve in simple models.
• Data analysis - Examining interest rate and yield curve data to find the best
model.

8. Valuation Services II
Probabilistic methods for interest rates
• Using the Heath, Jarrow and Morton model, & modeling the yield curve.
• Determining risk factors of yield curve evolution and optimal volatility structure.
• Pricing interest rate derivatives by Monte Carlo Simulation.
• The Libor Market Model, and calibrating the reference volatility structure by
fitting to caplet or swaption data.
• The SABR Model - Managing volatility risks, smiles, & local volatility models.
• Using the SABR model and hedging stability.
• The Arbitrage Free SABR model - Reduction to the effective forward equation,
arbitrage free boundary conditions, comparison with historical data, and
hedging with the SABR model.

9. Valuation Services III
Credit risk and credit derivatives
• Structural and Intensity models used for credit risk.
• CDS pricing, market approaches, and implied default probability, recovery rates, & default
time modeling.
• Synthetic CDO pricing, using the default probability distribution, default correlation,
tranche sensitivity, & pricing spreads.
• CDO/copula modeling using XLS spreadsheets.
• Correlation and state dependence analysis.
• Credit Valuation Adjustment (“CVA”): CVA exposure, modeling exposure, collateral,
wrong way risk, & right way risk.
• Risk of default - The hazard rate, the implied hazard rate, the stochastic hazard rate and
credit rating, as well as capital structure arbitrage.
• Copulas - Pricing basket credit instruments by simulation.
• Statistical methods in estimating default probability - Ratings migration, transition
matrices, and Markov processes.

10. Valuation Services IV
Stochastic volatility and jump diffusion
• Mean-variance analysis, the Merton model, jump distributions, expectations and worst case
analysis.
• Non-probabilistic models - Uncertainty in parameter values versus randomness in
variables, & nonlinear equations.
• Static hedging - Hedging exotic target contracts with exchange-traded vanilla contracts,
optimal static hedging.
• Advanced Monte Carlo techniques - Low-discrepancy series for numerical quadrature. (We
use this for option pricing, speculation, and scenario analysis.)

11. Valuation Services V
Commodity derivatives
• Speculation using energy derivatives and risk management in energy derivatives.
• Cointegration - Modeling long term relationships, and statistical arbitrage using mean
reversion.
• Forecasting by using option prices - Volatility forecasting using historical asset prices and
current option prices.
• Inserting commodity option prices into ARCH models.
• Density forecasting - Criteria for good forecasts, estimating risk-neutral densities from
option prices, & risk-neutral to real-world densities.
• Geometric Asian options, continuous
• Arithmetic Asian options, continuous
• Geometric Asian options, discrete
• Commodity Swaptions
• Spread options
• Mean Reversion models
• Multi-Factor models
• Convenience Yield models

12. Our Client-Friendly Pricing
1. Time & Expenses
2. Fixed fee
3. Notional Value based
4. Combination of 1, 2, and/or 3.

13. Appendix
Technical Competencies

14. Our Software Capabilities
• Excel +VBA
• Python
• R
• C++
• MATLAB
• Mathematica
• Crystal Ball
• @RISK

15. Our Platform Experience
• TriplePoint Commodity XL
• Openlink
• Endur
• Findur
• RightAngle
• Reval Saas TRM

16. Our Model Capabilities
• Black-Litterman
• ARCH
• GARCH
• Black-Scholes-Merton
• BSM ‘76
• The Greeks
• Black-Derman-Toy
• Monte Carlo Simulation
• Explicit Finite Difference Methods
• Crank-Nicholson
• Heath, Jarrow, & Morton
• SABR
• Barone-Adesi, & Whaley

17. Contact Information
Thomas J. McNulty, FRM
Director, Valuation and Financial Risk Management
Navigant Consulting, Inc.
713.646.5078
thomas.mcnulty@navigant.com