Mohamed Dafir, Vishnu N. Gajjala

Fuel Hedging and Risk Management

Strategies for Airlines, Shippers and Other Consumers

• Gebundenes Buch

Produktbeschreibung

A foundational guide to navigating the new fuel markets

Fuel Hedging and Risk Management: Strategies for Airlines, Shippers and Other Consumersprovides a clear and practical understanding of commodity price dynamics, key fuel hedging techniques, and risk management strategies for the corporate fuel consumer. It covers the commodity markets and derivative instruments in a manner accessible to corporate treasurers, financial officers, risk managers, commodity traders, structurers, as well as quantitative professionals dealing in the energy markets.

With the regime changes and elevated volatility observed in commodity prices over the last decade, fuel consumers are increasingly vulnerable to price shocks. The airline and shipping industries in particular have seen major structural and operational changes, with financial risk management superseding operational management in determining profitability. This book aims to present practical hedging solutions for managing fuel price risks while developing a holistic understanding of the risk management process, starting from hedge programme development and derivative structuring to financing, risk measurement and credit exposure management.

The book includes a wide variety of key topics, including a discussion of commodities and derivatives markets, financial risk analysis of commodity consumers, hedge programme design and implementation, vanilla hedging, and exotic hedging products. Advanced topics covered include commodity price and volatility models, the impact of model choice on exotic derivatives pricing and risk management, as well as credit risk in commodity derivatives transactions and associated CVA costs. The book is unique in providing intuitive guidance on understanding forward curve dynamics and volatility term structure evolution for commodities. It also helps link hedging-related decisions to the financing strategy of a firm, offering integrated solutions that exploit synergies available through bundling. Fully up-to-date and relevant, this useful guide gives you the information you need to successfully deal with volatile fuel prices.

The book illustrates the use of derivatives in real-world situations to manage commodity price risk with the help of term-sheets, payoff profiles, and scenario analysis. Comprehensive case studies illustrate the hedging process from conception to execution and monitoring of hedges in diverse situations, including hedge-portfolio restructuring and bundled financing, and hedging. Readers of this book can expect to:
* Develop a good understanding of fuel markets, derivatives market conventions, and popular hedge structures.
* Gain expert insight into all aspects of fuel hedging, price and volatility drivers, and dynamics
* Learn how to navigate energy prices and guard against volatility by employing effective risk management techniques
* Manage credit risk associated with commodity derivatives by understanding credit risk calculations, exposure optimization techniques, credit charges, such as CVA, DVA etc.

---

A hands-on guide to navigating the new fuel markets

Fuel Hedging and Risk Management: Strategies for Airlines, Shippers and Other Consumers provides a clear and practical understanding of commodity price dynamics, key fuel hedging techniques, and risk management strategies for the corporate fuel consumer. It covers the commodity markets and derivative instruments in a manner accessible to corporate treasurers, financial officers, risk managers, commodity traders, structurers, as well as quantitative professionals dealing in the energy markets.

The book includes a wide variety of key topics related to commodities and derivatives markets, financial risk analysis of commodity consumers, hedge program design and implementation, vanilla derivatives and exotic hedging products. The book is unique in providing intuitive guidance on understanding the dynamics of forward curves and volatility term structure for commodities, fuel derivatives valuation and counterparty risk concepts such as CVA, DVA and FVA. Fully up-to-date and relevant, this book includes comprehensive case studies that illustrate the hedging process from conception to execution and monitoring of hedges in diverse situations.

This practical guide will help the reader:
Gain expert insight into all aspects of fuel hedging, price and volatility drivers and dynamics.
Develop a framework for financial risk analysis and hedge programs.
Navigate volatile energy markets by employing effective risk management techniques.
Manage unwanted risks associated with commodity derivatives by understanding liquidity and credit risk calculations, exposure optimization techniques, credit charges such as CVA, DVA, FVA, etc.

Praise for Fuel Hedging and Risk Management

"Risk Management is an art, not a science, but it certainly helps to know a lot of science. In this book, the authors provide an excellent overview of both qualitative and quantitative aspects of risk management and how to design and implement effective win-win fuel oil hedging strategies that will achieve the desired objectives under normal and extreme market conditions.

In addition to discussing key foundational issues, the book also discusses a framework to understand and manage hugely important second-order effects, such as credit risk or margin calls or asset-liability mismatches, which have the potential to turn a good idea into a bad outcome.

A must read for anyone in the finance department of a corporate, trade house, or financial firm involved in fuel oil hedging."
--Diego Parrilla, Former Global Head of Commodity Solutions and Head of Commodities, Bank of America

"This book provides highly useful insights into hedging and risk management methodologies, as well as theory, for the users of energy products. Dafir provides intuition stemming from not just top-tier commodity structuring expertise, but also broader insight from his earlier experience as a credit derivatives and exotics trader."
--Mitch Matharu, former Head of Structuring, Merrill Lynch

"An Absolute Must Read. From the fundamentals of oil markets to the key points in negotiating a credit agreement and minimizing hedging costs, passing by the subtleties of implied volatility surface construction and its implications in derivatives pricing, this book offers you the indispensable practitioner's toolbox, useful whether you are a novice or a seasoned fuel trader."
--Frederic Cogny, Global Head of Commodities Structured Products Trading, Standard Chartered Bank

"In this book, Dafir blends his deep knowledge of the commodity markets and the vagaries of the financial market with his incredible mathematical ability to explore fuel hedging in a manner accessible to Fuel Procurement Departments, CFOs and board members."
--Mark Long, Former Head and Managing Director of Merrill Lynch Commodities Asia

". . . This book is a hands-on guide for anyone interested in "Fuel Hedging and Risk Management", including lawyers involved in the

Produktdetails

• Wiley Finance Series
• Verlag: Wiley & Sons
• 1. Auflage
• Seitenzahl: 320
• Erscheinungstermin: 25. April 2016
• Englisch
• Abmessung: 251mm x 172mm x 27mm
• Gewicht: 682g
• ISBN-13: 9781119026723
• ISBN-10: 1119026725
• Artikelnr.: 42202184

Autorenporträt

SIMO M. DAFIR is a Managing Director at Volguard, a financial consulting firm specializing in Capital Markets, Wealth Management and Derivatives. He has over fourteen years of experience during which he has held senior positions in a number of major international banks in Hong Kong and Singapore. He was the Regional Head of Commodity Structuring at Standard Chartered Bank, Head of Commodity Exotics and Hybrids at Merrill Lynch Asia, and Trader of Credit Derivatives at Credit Suisse. He is also Professor of Global Financial Markets at Sorbonne Assas International Law School and an expert witness for financial markets litigations. Dafir started his career in Aerospace and Telecom at the European Space Agency and Alcatel. He holds an MBA from INSEAD, a Post Graduate Research Degree from the National Polytechnic Institute of Toulouse, an MSc in Automation from ENSEEIHT and a Bachelor's degree in Mathematics. VISHNU N. GAJJALA is a commodity derivatives expert at Volguard, where he oversees the financial market analytics business. He has held positions in commodities structuring and sales at institutions including Standard Chartered Bank and Merrill Lynch, where he developed customized strategies for commodity hedgers and investors, including airlines, mining companies, trading houses, private banks and sovereign wealth funds. He holds a Bachelor's degree in Electrical Engineering from IIT Madras and an MBA from IIM Bangalore. Vishnu currently resides in Singapore.

Inhaltsangabe

Preface xiii Acknowledgments xix About the Authors xxi CHAPTER 1 Energy
Commodities and Price Formation 1 Energy as a Strategic Resource 1 Energy
as a Tradable Commodity 3 Energy Commodities 5 Crude Oil 5 Oil Products 8
Natural Gas 11 Coal 11 Price Drivers in Energy Markets 12 Geopolitical
Risks 12 The Geopolitical Chessboard - The Petrodollar System and Rising
China 12 Long-Term Supply and Demand 15 Short-Term Supply and Demand:
Supply Chain and Infrastructure 17 Financialization of Commodities 19
Market-Specific Price Drivers 19 Summary 20 CHAPTER 2 Major Energy
Consumers and the Rationale for Fuel Hedging 23 Energy Market Participants
23 Risks Faced by Fuel Consumers - The Case of the Airline Industry 27
Airline Industry - Metrics and Operational Risks 27 Airline Industry -
Financial Risks 30 Risks Faced by Other Major Fuel Consumers 35 Shipping
Companies 35 Land Transportation 37 Oil Refining, Petrochemicals, and Power
Generation 37 Industrial Users of Energy Commodities 38 The Case for
Hedging 39 The Effect of Hedging on Airline Stock Price Volatility 39
Commodity Derivative Markets 41 A Brief History of Commodity Markets 42
Commodity Spot Markets and the Need for Standardization 43 Forward
Contracts 44 Futures Contracts 45 Option Contracts 50 Summary 53 Appendix A
54 CHAPTER 3 Developing Fuel Hedging Strategies 55 The Rationale for
Commodity Hedging 55 Developing a Fuel Hedging Program 57 Risk
Identification and Assessment 57 Types of Risk 58 Risk Identification 59
Forecasting Prices and Conducting Simulations 59 Articulating the Firm's
Risk Appetite 60 Setting Objectives for Fuel Hedging and the Scope of
Hedging 60 Identifying Risk Managers within the Organization 61 Determining
the Scope of the Hedge Program 61 Implementation of Hedging 62 Selecting
the Fuel Cost Management Method 62 Identifying the Underlying to Hedge with
and Basis Risk 63 Quantity and Tenor of Hedging 66 Selection of Instruments
for Hedging 67 Market Risk 68 Management of the Unwanted Risks of a
Portfolio 68 Credit Risk 68 Liquidity Risk 69 Operational Risk 69 Legal and
Reputational Risk 70 Monitoring and Calibration of the Hedging Program 70
Template for a Risk Management Policy 71 The Airline Industry - Trends in
Fuel Risk Management 71 Magnitude of Fuel Price Risk 71 Underlyings and
Hedging Instruments 73 Quantity and Tenor of Hedging 74 Recent Developments
75 Summary 75 CHAPTER 4 Shipping and Airlines - Basics of Fuel Hedging 77
Spot-Forward Relationships 77 Theories on the Shape of Forward Curves 78
Spot-Forward Relationships for Investment Assets 79 Spot-Forward
Relationships for Commodities 80 Spot and Futures Volatility 81 Options 82
Call and Put Options 83 Put-Call Parity 84 Option-Based Hedging for a
Shipping Company 85 Implied Volatility and the Black-Scholes Model 86 The
Black-Scholes-Merton Model 88 Black's Model for Pricing Options on Futures
Contracts 89 The Greeks 89 Delta 90 Gamma 92 Theta 92 Vega 94 Rho 94
Higher-Order Greeks 95 Black's Model Option Greeks 95 Asian Swaps and
Options 96 Asian Swap-Based Hedging for a Shipping Company 97 Option
Structures 97 Call Spreads and Put Spreads 97 Collars, Three-Ways, and
Calendar Spread Options 99 Straddles, Strangles, and Butterflies 100 Capped
Forwards 102 Capped Swap Usage for a Shipping Company 103 Derivatives
Pricing 104 Stochastic Processes for Asset Prices - An Introduction 104
Brownian Motion and Wiener Processes 104 Itô's Lemma 106 Option Pricing
Using the Black-Scholes-Merton Formula 107 Asian Option Pricing 109 Summary
112 CHAPTER 5 Advanced Hedging and Forward Curve Dynamics 113 Swap and
Vanilla Option-Based Structures 113 Zero-Cost Structures and the Usage of
Options 114 Leveraged Swaps 114 Capped Swaps 116 Floored Swaps 117 The
Volatility Surface 118 Multi-option Structures 119 Zero-Cost Collar 120
Three-Ways 120 Risk Reversals and their Hedging 121 Early-Expiry Options
and Instantaneous Volatility Term Structures 122 The Samuelson Effect and
the Storage Theory 122 Implied Volatility of Energy Futures Contracts 123
Early-Expiry Profile Construction 124 Commodity Swaptions and Extendible
Swaps 127 Usage of Commodity Swaptions and the Reasons for their Popularity
127 Swaption vs. a Basket of Options 128 Understanding Commodity Futures
Term Structures 133 The Normal Backwardation or Keynesian Theory 133 The
Theory of Storage 134 Term-Structure Models 135 Schwartz's One-Factor Model
135 Schwartz's Two-Factor Model 136 Gabillon's Model 137 Gabillon's
Stochastic Equation for Futures 138 Early-Expiry Profile Using Gabillon's
Model 139 Importance of Early-Expiry Profile for Exotic Products 139
Summary 140 CHAPTER 6 Exotic Hedging and Volatility Dynamics 141 Extendible
Option Structures 142 Extendible Collar 142 Extendible Three-Ways 143
Cancellable - Extendible Parity 144 Pricing Extendible Option Structures
146 Volatility Models 150 Stochastic Volatility Models 150 Barrier
Option-Based Structures 152 Knock-Out Options and Knock-In Options 152
Relationship between KI and KO Options 154 Knock-Out Swaps 154 Airbag
Structure 154 KIKOs and Combinations of KI and KO Options 155 Accumulator
Structures 156 European or Asian-Style Barrier Options 157 Barrier Payouts
and Non-linearity - Digital Options and Replication 157 The Reflection
Principle 160 Barrier Options Under the Black-Scholes Framework 161
Put-Call Symmetry 163 MTM Analysis of Barrier Options Under the
Black-Scholes Framework 163 Pricing and Risk Management of Barriers with
Real-World Constraints 165 Barrier Options on a Nearby Futures Contract 167
Local Volatility Models 168 Bermudan Extendible Structures 170 Valuation of
Bermudan Extendibles 174 Longstaff-Schwartz Method and Exercise Boundaries
174 Extendible vs. Auto-callable Transactions 177 Bermudan Extendibles and
the Forward Skew 177 The Inverse Leverage Effect in Commodities Markets 179
Target Redemption Structures 180 Target Redemptions and the 2008 Debacle
182 Defining Leverage 183 Target Redemption Pricing and Risk Management 184
The Mean-Reversion Trap 185 Target Redemption and Trading Risks 186 Sticky
Strike and Sticky Delta 187 Sticky Strike Approach 187 Sticky Delta or
Sticky Moneyness 188 Gamma/Theta Ratio 188 Summary 190 CHAPTER 7 Fuel
Hedging and Counterparty Risk 191 The Importance of Valuation and
Transaction Monitoring 191 Market Risk Management 192 Fuel Hedgers: Lottery
Tickets and Spring Cleaning 193 Value at Risk 194 Liquidity Risk 195
Counterparty Risk 195 Credit Risk and Counterparty Risk 196 Expected
Exposure 198 Potential Future Exposure 198 Measurement of Counterparty Risk
for a Portfolio of Trades 198 Peak PFE 198 Common PFE Misconceptions and
Pitfalls 200 Credit Exposure Optimization Techniques 202 Bilateral Netting
Agreements 202 Credit Support Annexes 203 CSA Negotiations - Key
Considerations 203 Funding Valuation Adjustment 206 Fuel Hedgers and FVA
207 The FVA Debate 209 The Price of Counterparty Credit Risk 209 Credit
Derivatives and Credit Default Swaps 210 Credit Valuation Adjustment 212
Common CVA Mis-steps 213 Gap Options and Collateralization Agreements 213
Debt Valuation Adjustment 214 Fuel Hedgers and Debt Valuation Adjustments
214 The Case for Bilateral CVA 215 Wrong-Way Risk 216 Counterparty Credit
Risk Hedging 216 Contingent CDS 216 Capped Exposure Derivatives 217 Summary
217 CHAPTER 8 Conducting Scenario Analysis 219 Scenario Analysis for
Vanilla Products 220 Scenario Analysis for Path-Dependent Products 224
MTM-Based Scenario Analysis and Potential Future Exposures 229 Beyond
Payoffs and MTMs - Collateralization and Funding Requirement Analysis 230
Hedge Effectiveness 231 Summary 233 CHAPTER 9 Financing and Risk
Management: Bundled Solutions 235 Structured Aviation Finance Overview 235
Airline Financing via Debt and Aircraft Leases 238 Term Loans 239 Export
Credit Agency Debt 240 Leases 240 Rationale for Combining Hedging and
Financing 243 Reduction of Default Risk through Hedging 244 Oil-Linked
Financing Structures 245 Flexible Oil-Insulated Lease 246 Cancellable
Hedged Loans as Interest Cheapeners 250 Summary 252 CHAPTER 10 Applied Fuel
Hedging - Case Studies 253 Case Study 1: YM Cargo Inc. 253 Business Risks
253 Operational Mitigants 254 Risk Appetite 255 Hedge Program Objectives
and Scope 255 Implementation of Hedging 256 Portfolio Monitoring 260 Case
Study 2: Worldwide Airlines 260 Evolution of WWA's Hedging Strategy 262
Hedging Transactions Executed by WWA 264 Hedge Portfolio Analysis 267
Credit Lines and Collateralization Issues 269 Restructuring WWA's Portfolio
271 Counterparty Risk and Funding Considerations for BMC 272 Summary 276
Bibliography 277 Index 281