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Technology in Fuel Risk Mgt
Recent developments and Industry trends
Wednesday, October 4th, 2017 Peter Moore, Head of Product Management
Technology in Fuel Risk Mgt Recent developments and Industry trends - - PowerPoint PPT Presentation
Technology in Fuel Risk Mgt Recent developments and Industry trends - - PowerPoint PPT Presentation
Technology in Fuel Risk Mgt Recent developments and Industry trends Peter Moore, Head of Product Management Wednesday, October 4th, 2017 Cyber Attacks 3 Is there safety in the Cloud? 4 How does the Cloud work? 5 Other benefits of Cloud
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Is there safety in the Cloud?
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How does the Cloud work?
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Other benefits of Cloud Computing
- Global Access
- Lower Total Cost of Ownership
- Faster time to market
- Simpler, quicker upgrades
- Scalability
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Takeup of Cloud Technology
2011 IBM Survey of Business & Technology Leaders:
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Takeup of Cloud technology
2017 Energy Risk Survey on Cloud usage in Energy/Commodities:
- 64% would like to deploy more to cloud in future
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Other Technology Developments in CTRM
- More analytics employed in hedge strategy
- More automation and integration between systems
- Greater attention paid to credit risk
- Concern over potential impact of regulatory developments
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Cash Flow at Risk
- A probability based measure of worst case cost of commodity
purchases
- Takes into account market characteristics
- Enables a rigorous, quantitative approach to analysing effect of
hedge strategies
- Enables risk based approach to dynamic hedging
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Illustration: buy 100k MT Jet NWE for next 2 years
- As of end Sept 2017, market was pricing a 24 month swap to Dec 19 at $551/MT
- Implies spend on Jet fuel of $1.3bn
- Market implied volatility ~30%
- Implies 1/20 probability cost > $1.9bn, conversely 1/20 probability cost < $880 MM
- Alternatively, implies worst case fuel price $805, best case $367
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What happened when volatility was higher?
- In Feb 2017, market implied volatility was ~55%
- Market price for 24 month swap was $409, implying cost of $908 MM
- 95% CFaR = $1.6bn, 5% CFaR = $550 MM
- Implied prices of $683 @95%, $230 @5%
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What does a Jet Swap hedge do to CFaR?
- Hedge 50% of exposure at market rate
- 95% CFaR = $1.6bn, 5% = $1.1bn
- Implied fuel price @95% = $683, 5% = $463
- => implied best to worst range of $219
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What about hedging with Brent?
- Same effective hedge % with Brent swap = 394,000 bbl/mth
- 95% CFaR = $1.7bn, 5% = $1bn
- Implies 95% price of $714, 5% price of $427
- Effective best to worst range of $288
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Credit Risk
- Airline counterparties have evolved measurement of credit risk:
- Notional Exposure
- MTM
- VaR
- CFaR
- PFE
- CVA
- This affects your credit utilisation
- Can you verify the counterparty’s calculations?
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Regulatory developments
EMIR – Report all OTC trades to a Trade Repository; mandatory clearing of trades if gross positions > EUR 3bn…Under Review MIFID 2 – position limits, trade reporting, best execution. CRD IV – capital requirements for commodity dealers – delayed to Dec 2020 IFRS 9 – changes to hedge accounting standards
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Dealing with regulatory changes
PEOPLE PROCESSES TECHNOLOGY
Practicalities behind monitoring and reporting How people, technology and processes can help address the reporting requirements more effectively
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Questions and Answers
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For more information, email us at getinfo@fisglobal.com or visit www.fisglobal.com/energy
Thank you
Peter Moore
Product Manager – Kiodex Risk & Compliance T: (+44) 208 081 2639 C: (+44) 7785 753409 E: peter.j.moore@fisglobal.com