platts 3rd annual european crude oil markets keynote by eldon klaassen
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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.
www.allegrodev.com
Risk ManagementCommodity TradingPhysical LogisticsRegulatory Compliance
www.allegrodev.com
Optimizing market data to manage risk in crude oil markets
Eldon KlaassenCEO
04/10/2023
© 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.
www.allegrodev.com
Allegro Development Corporation
Petroleum
Power
Coal
Natural Gas
» 2009 Energy Risk “Software House of the Year Award”
» 2008 Energy Business Awards “Gold Award for Excellence in Energy Technology”
» Serving more than 100 global customers for over 26 years
» Office locations in London, Zurich, Singapore, Calgary, Houston, & Dallas
Allegro delivers the industry’s leading multi-
commodity trading and risk management software.
04/10/2023
© 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.
www.allegrodev.com
Optimizing market data
Efficient capture and validation of data
Forward curves, volatility, and correlations
Market metrics and attribution
Market, basis, credit, and liquidity risk
04/10/2023
© 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.
www.allegrodev.com
Market data sources
04/10/2023
External Data Sources» Spot prices» Exchange prices» Broker quotes» Currency exchange» Interest rates» Credit ratings» Tariffs» Freight
Trading & Risk Management System
Internal Data Sources» Trader observations» Production costs» Refinery spreads» Credit history
© 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.
www.allegrodev.com
Automated data validation
Validation rules» Omission» Source variance» Time horizon variance» Basis variance
Correction procedures» Notifications» Manual corrections» Automated corrections
04/10/2023
4-Jan-10
6-Jan-10
8-Jan-10
10-Jan-10
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26-Jan-10
28-Jan-10
30-Jan-10
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5-Feb-10
7-Feb-10
9-Feb-10
11-Feb-10
13-Feb-10
15-Feb-10
17-Feb-10
19-Feb-10
21-Feb-10
23-Feb-10
25-Feb-10
65.00
70.00
75.00
80.00
85.00
90.00
Plt Dated Brent Plt Dubai 1st Mth Plt Ekofisk 1st MthPlt Forties 1st Mth Plt Gippsland 1st Mth Plt Minas 1st MthPlt Oman Blend 1st Mth Plt Oseberg 1st Mth Plt Tapis Blend 1st Mth
© 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.
www.allegrodev.com
Forward curves
Forward curve creation» Current prices for future delivery» Basis differentials-net back/net forward» Interpolation/extrapolation» Historical simulation» Mean reversion rates
Multiple forward curve analysis» Linear, non-linear, step functions» Scope of historical price behavior» Deviation of forward curve assumptions
04/10/2023
1-Apr-1
0
1-Jul-1
0
1-Oct-
10
1-Jan-11
1-Apr-1
1
1-Jul-1
1
1-Oct-
11
1-Jan-12
1-Apr-1
2
1-Jul-1
2
1-Oct-
12
1-Jan-13
1-Apr-1
3
1-Jul-1
3
1-Oct-
13
1-Jan-14
1-Apr-1
4
1-Jul-1
4
1-Oct-
14
1-Jan-15
1-Apr-1
5
1-Jul-1
5
1-Oct-
15 75.00
77.00
79.00
81.00
83.00
85.00
87.00
89.00
ICE Brent CrudeDME Oman CrudeNYMEX WTI Cushing
© 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.
www.allegrodev.com
Volatility and correlationVolatility
» Volatility indexes—logical groupings» Historical volatility, implied volatility» Volatility smiles, skew
Correlations» Historical correlation» Seasonal effects» Liquidity effects
© 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.
www.allegrodev.com
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
© 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.
www.allegrodev.com
Option Valuation: Financial OptionsExchange 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
© 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.
www.allegrodev.com
Option Valuation: Physical OptionsPricing
» Floors and caps» Price triggers
Logistics» Vessel loading tolerance» Take or pay contracts» Time charters
Inventory and storage» Crude oil injection and withdrawal
© 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.
www.allegrodev.com
Option Valuation: Exercise & ConstraintsPhysical 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
© 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.
www.allegrodev.com
Basket Prices
04/10/2023
• Brent • Forties• Oseberg• Ekofisk
BFOE
• Mars• Poseidon• Southern Green
Canyon• Thunder Horse
ACM
• Minas• Tapis• Gippsland• Dubai• Oman
ICP
© 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.
www.allegrodev.com
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
04/10/2023
© 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.
www.allegrodev.com
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
04/10/2023
© 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.
www.allegrodev.com
Profit and Loss Attribution
04/10/2023
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
© 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.
www.allegrodev.com
Profit and Loss Attribution
04/10/2023
Brent
Dubai
Ekofisk
Forti
es
Gippsland
MinasOman
Oseberg Ta
pisW
TI (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
© 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.
www.allegrodev.com
Market and basis risk
Exposure disaggregation
Mark to market
Value at risk
04/10/2023
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10Jul-1
0
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
-
5.000
10.000
15.000
20.000
25.000
WTITapisOsebergOmanMinasGippslandFortiesEkofiskDubaiBrent
© 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.
www.allegrodev.com
Liquidity risk
Cash flow disaggregation
Margin requirements
Cash flow at risk
04/10/2023
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10Jul-1
0
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
(200.0)
(150.0)
(100.0)
(50.0)
-
50.0
100.0
150.0
200.0
Margin disbursementsMargin receiptsCash disbursementsCash receipts
© 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.
www.allegrodev.com
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
© 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.
www.allegrodev.com
Optimizing market data
04/10/2023
Efficient capture and validation of data
Forward curves, volatility, and correlations
Market metrics and attribution
Market, basis, credit, and liquidity risk
© 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.
www.allegrodev.com
Risk ManagementCommodity TradingPhysical LogisticsRegulatory Compliance
www.allegrodev.com
Optimizing market data to manage risk in crude oil markets
Eldon KlaassenCEO
04/10/2023
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