My Resume
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http://www.linkedin.com/in/phillipgreenderivativestrading http://derivativestradingdesk.emurse.com/

CME and NYMEX losing WTI as the benchmark for crude oil trading?

http://tonto.eia.doe.gov/dnav/pet/pet_pri_spt_s1_d.htm

Recent events such as volatile price movements, widely unregulated speculation and competition from the International Continental Exchange (ICE) and commodity and exchange-traded funds (ETF’s) have largely tapped into the MYMEX’s long reign as the premier exchange for what is considered the most liquid oil commodity: West Texas Intermediate (WTI) Light Sweet Crude Oil Futures Contracts.

http://www.cmegroup.com/education/events/forms/understanding_the_global_crude_oil_benchmark.html

NEW YORK, (Reuters) – U.S. cash crude differentials edged higher Monday, reversing some of their losses from the last trading session on Thursday, as spreads weakened and the price of front-month futures plunged.

Light Louisiana Sweet rose 20 cents to $3.55 a barrel over West Texas Intermediate. Poseidon sour rose 40 cents to $1.80 below WTI.

On futures markets, May WTI fell $2.24 cents to $50 a barrel in after-market trade. May Brent fell $1.88 to $52.18, leaving WTI at a $2.18 a barrel discount to Europe’s Brent, up from a $1.97 a barrel discount last Thursday.

Oil futures fell after the International Energy Agency cut its forecast for oil demand in 2009, saying it may fall by 2.4 million barrels per day this year compared with 2008.

The May-June WTI spread widened to -$3.07 from -$2.50 a barrel during the last trading session.

A weakening of the WTI front-month contract and a widening discount for WTI against Brent usually lead to stronger cash crude differentials.

Product by Area
04/06/09 04/07/09 04/08/09 04/09/09 04/13/09 04/14/09 View
History

Crude Oil

WTI – Cushing, Oklahoma
51.1 49.13 49.37 52.24 50.22 49.51 1986-2009

Brent – Europe

50.91 50.62 52.06 52.33 50.73 52.06 1987-2009

http://www.linkedin.com/in/phillipgreenderivativestrading

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QUALIFICATIONS
Senior Business Analyst Capital Markets, Derivatives and Commodities and Energy Openlink Endur and Energy Trading Risk Management
Project Manager

Derivatives, Commodities, Credit Default Swaps, Openlink Endur, Murex, Calypso, Advent Geneva, Sophis Risque, Triple Point, Sungard, Latent Zero, Swapswire, Heliograph, Sophis value, Capital Markets, Fixed Income, Futures, Options.

Business Analysis, Requirements Gathering, Money Markets, Mortgage-Backed Securities, Equity, Debt, FX, Swaps, Interest Rate Derivatives, Credit Derivatives, Wall Street Systems, Sungard, Triple Point, Allegro, Energy Trading Risk Management, documentation, FERC, SAP, specifications, ERCOT, AML, Currency, Foreign Exchange, Portia, Eagle, PACE, Charles River, Compliance, trade blotter, FAS 133, mark-to-market, hedge effectiveness, testing, UAT.

Deliverables, methodology, functional requirements, business processes, business analyst, lifecycle, repository, user acceptance testing, project planning, project scope, project team, reengineering, business needs, project life cycle, requirements gathering, workplans, business process reengineering, best practices
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PROFESSIONAL EXPERIENCE
Senior Business Analyst and Project Manager – Derivatives, Securities, Fixed Income, Hedge Funds, Risk management, Capital Markets, Energy trading, FX, Futures, Options, Commodities, Debt, Equity and Structured Products

Portfolio and Investment Management trading and order management systems, OpenLink Endur, gMotion, Allegro, Zai*Net, Triple Point, energy trading risk management systems Senior Business Analyst. Sophis, Murex, Calypso, Charles River, Wall Street Systems, Trema, SAP accounting, SunGard, Latent Zero and Advent Geneva. Commodities, Futures, options, CDO, CDS, CMO, CCS, MBS, Base Metals, Precious Metals, Interest Rate Swaps, Credit Derivatives, Credit Default Swaps, vaR, Swaps, Bonds, Equity Swaps, Capital Markets, Fixed Income, Structured Products, FX and Treasury.

Openlink Endur Clients (NDA confidential) – Zurich, Switzerland and London, UK January 2008 – current d/b/a Derivatives Trading Desk, LLC
Project Lead/Senior Business Analyst Contractor/Consultant – ETRM and Openlink Endur Senior Business Analyst
Carbon Credits, Emissions, CO2, EUA-CER green certificates, precious metals (silver, gold, palladium, platinum), gas physical deals, gas Swaps, long-term power deals, day-ahead gas deals in Openlink Endur trading manager module and settlements desktop for invoicing and settlement of energy transactions; working with Commodities ops team for booking forwards, futures, swaps, power term forwards, energy options, calendar strips, cascading futures in Openlink Endur. Requirements specifications of all aspects from market data, online reconciliation reports, EOD processing scripts, trade modeling, deal modeling, risk process, settlement’s desktop, accounting manager, and trader desktop. Using Endur Instrument types COMM-SWAPS, COMM-PHYS, COMM-EXCH. Business Analyst Responsible for Openlink Endur functional specifications for:

• New functionality analysis for Reconciliations, Reference, Ops Manager in Endur v8
• Trader desktop implementation for Endur deal templates in Trade Blotter
• Endur settlements Desktop for invoicing and generating cash and physical payments
• Endur Accounting Manager module analysis for Nostro accounts
• New functionality analysis for gMotion and pMotion enhancements to Endur
• Metals migration and new Instruments (Carbon Credits, emissions, “green” certificates for CO2)
• Openlink Endur accounting, PnL, deviations, accruals, realized and unrealized gains, standard costs, fees, VAT, nostro and vostro accounting
• Power and Gas confirmations downstream to SAP from Endur
• Endur autosys for EOD Metals booked automatically
• Swaps, plain vanilla, Strips, Spread options, Swaptions, extendible swaps, Swing options for volumes on options, Barrier knock-in and knock-out options, interruptible power embedded swing options, and basis swing options cross-region.

Fortis Investments Brussels, Belgium January 2008 – current
Project Lead/Senior Business Analyst Contractor/Consultant
OTC Derivatives Project – Derivatives platform Implementation of vendor solution, short-listed to Murex and Calypso

Write Detailed Business requirements documents (BRD) and assessment of current OTC derivatives instruction trade management processes for front, middle and back office, reference data, data attributes and security master database. Asset classes covered include Interest Rate Derivatives, OPUS derivatives pricing, Equity Swaps, Interest Rate Swaps, Credit Default Swaps, Foreign Exchange Swaps, Equity options, Swaptions, Foreign Exchange Options and Equity/Index Derivatives and Structured Credit Derivatives.
Authored “road-map” and assessment and integration requirements with Swapswire, DTCC, DerivServ and Bloomberg pricing data. Implementation project plans and business requirements, configuration and trade blotter for Calypso, Murex, Sophis Risque, Sophis Value. Workflow documentation for downstream systems Decalog, Heliograph, Corona, ThinkFolio, T-Zero and Bloomberg. Developed and maintained testing scenarios and scripts.
Recommend strategic initiatives and analyze OTC derivatives protocols and practices around DTCC, and Advent Geneva Global Portfolio Accounting System’s RSL reports and instrument coverage including cliquets, CFD’s and first to default for Fortis Bank, SWIFT, Swapswire, FpML, DerivServ, and ISDA.

Shell Trading Houston, TX Senior Business Analyst Contractor /Consultant
Openlink Endur v. 8.x Apr 2007 – Jan 2008
Business requirements and assessment of current Openlink Endur v.5 to implementation of Endur v.8 and integration with AcuRisk, Nucleus, Triple Point, Advanced Analytics, performance evaluation for remote locations, Cash Month Position Management, tactical tradebook, SENA, TPORT, Endur center of excellence workflow requirements, Commodities: Crude oil, Natural Gas, LNG, heating oil, Naptha, Distillates, Natural gas liquids. Includes ethane, propane, butane and condensate. Cash Month PnL Reporting, assessment of Openlink replacing DealView, meet with OLF developers for review sessions, integrate Nucleus into Endur and write extraction requirements; review dBase logic and Endur GUI. gMotion, Deal management, Deal Entry, Deal Capture and Deal modeling and transaction history, power, gas, scheduling, front office and mid-back operations experience. Daily Volume cuts and Price Changes, position monitoring, scheduling, tactical tradebook. Write short charter for financial reconciliations and build roadmap for Openlink Endur 8.x implementation, testing and extraction of Nucleus archived and real-time data.

Supported a highly diverse portfolio of applications including: electric wholesale and retail trading, scheduling, risk management, settlement and accounting. Documented business and technical requirements, along with developing design specifications, test plans, and use cases for business requirements. Experience supporting Openlink’s Endur application (version 8.0)
Working knowledge of Openlink Endur base simulations (e.g., P&L), and the ability to create and debug user defined simulations. Ability to create and modify deal entry templates and deal skins.
Ability to create and modify Endur reports using SQL, Business Objects and Crystal.
Supported Endur ICE, Power Market Gateway and pMotion power scheduling interfaces.
Experience supporting Endur in an electricity and power generation market environment.
I have strong SQL and relational database skills, using SQL Server 2005 or Oracle 10.
Great interpersonal skills and the ability to deal with all levels of business users and management.
Very good Analytical skills, which have been demonstrated in a business environment.
Knowledge of electricity markets and operations and ISO, PMJ, FERC.

Bank of New York One Wall Street, New York City, NY Jan 2006 – Apr 2007
Project Lead/Senior Business Analyst Contractor
OTC Derivatives project

Business requirements and assessment of current OTC derivatives instruction trade management processes, reference data, data attributes and security master database. Asset classes covered include Interest Rate Derivatives, OPUS derivatives pricing, Equity Swaps, Interest Rate Swaps, Credit Default Swaps, Foreign Exchange Swaps, and Equity options, Swaptions, Foreign Exchange Options and Equity/Index Derivatives.

Recommend strategic initiatives and analyze OTC derivatives protocols and practices around DTCC, SWIFT, Swapswire, FpML, Advent Geneva Global Portfolio Accounting System, DerivServ, and ISDA.

Wachovia Bank/Evergreen Investments Charlotte, NC Jun 2005 – Jan 2006
Senior Business Analyst — Contractor
Long/Short Hedge Fund Derivatives Senior Business Analyst

Wrote business requirements and interviewed portfolio managers and traders to implement a new International Small Cap Long/Short Hedge Fund. The hedge fund seeks to take long positions in undervalued and under-followed international equities. BA responsibility is to map and test data requirements for futures, options and other derivative instruments into existing trade order management system and back-office accounting.

Created cash flow models for Credit Default Swaps, Interest Rate Swaps, Total Return Swaps, Currency Forwards, Cross-Currency Interest Rate Swaps, Equity options, Structured products, Currency Futures, Options, Exchange Traded Funds (ETFs), and indexes on commodity futures, i.e., the Goldman Sachs Commodity Index (GSCI) and the Dow Jones Commodity Index (DJ-AIGCI); diagram swap accruals, payment cash flows, and settlement scenarios to show gains and losses of hedge.

Documented how the following applications will be used in the hedge fund initiative:
Fact Set, Derivative Solutions, Thomson PORTIA, Macgregor Fixed Income Order Management and DTCC (Depository Trust Clearing Corporation).

JPMorgan Chase Columbus, OH Dec 2004 – Jun 2005
Senior Business Analyst — Contractor
Latent Zero Implementation Project Manager/Senior Business Analyst

Tasked with documentation deliverables for the Latent Zero asset management front office trade order management system. Integration documentation for JP Morgan and Salerio stock trading algorithm tools for both asset and funding desk. Created test cases, test plans for Charles River compliance rules for the algorithm tools. Documenting all asset classes and instruments that portfolio managers and trade desks will be trading. Reconciliation from trade order management system to portfolio accounting system Advent Geneva. Implementing interfacing Check Free Trade Flow to clients, SWIFT and Accounting systems

Latent Zero Capstone suite consisted of Sentinel, Minerva and Tesseract. This application was complemented by Yield Book, CMS Bond Edge and Salerio and CheckFree Trade Flow.

Documented trade order lifecycle for all instruments: equities, equity options, structured products, equity derivatives, Fixed Income, treasury bonds, Auction Rate securities including corporate and municipal bond debt instruments, Variable rate Demand and Preferred, Dutch Auction Securities, OTC derivatives, energy derivatives, Structured products, Money Market instruments, FX, mortgage-backed securities, Asset-backed securities, alternatives investments, Collateralized Debt Obligations and the agencies (e.g., FNMA, GNMA, and FHLMC).

BP (British Petroleum) Naperville, IL Apr 2004 – Dec 2004
Senior Business Analyst (Contractor) APR Project (Automated Positions Reporting)

Requirements gathering with trade control analysts and traders to consolidate data repository for reporting BPs crude oil and products Futures & Options, hedges, swaps and Volumetric Exposure on the New York Mercantile Exchange up to regulatory bodies (NYMEX trade regulators and FERC (Federal Energy Regulatory Commission) regulators. Reconciling positions in IST Trade Control for APR (Automated Positions Reporting) for market and supply crude (WTI, Brent, others), heating oil (HO) and unleaded gasoline (UNL). Data, futures, options positions, EFP and Swap deals data from MOFT, US Crude Supply Exposure Model and US Product Supply exposure Model, Cantera, Camera (Houston), aggregate exposure Excel sheets from Calgary and Crude Excel sheets from La Palma. Business Objects, MOBO, MOFT (Middle Office Fast Track – position and pricing aggregator for Wet Deals), GlobalView external price feeds vendor for NYMEX, Platt’s and OPIS.,Clearvision, Openlink Endur v5, v8, Allegro, Entegrate, Triple Point (for deal valuation and calculation of OTC options); and PAWS (Petroleum Analysis Work Station used by the traders for M-T-M accounts, and SAP 4.6 (for operational and accounting system), and Zai*Net power trade capture system.

Responsible for business user review sessions, requirements gathering, UAT test scripts, gap analysis, data consolidation, benchmarks, metrics and attributes for Automated Positions Reporting.
Responsible for writing specifications to build data store, data assumptions, Dimensions, data fields specific to entity (hedge group), deal information fields (Market vs. Supply, Deal type: Wet, Paper, EFP, Swap); future specific and Option specific data(NYMEX open interest, IPE, OTC, option delta), and EFP specific, Swap, Market, Supply Crude (crude grade, WTI, Brent, Dubai, EOR, WOR crude categories) and product specific requirements.

Fifth Third Bank Cincinnati, Ohio Dec 2002 – Apr 2004
Project Manager/Senior Business Analyst — Capital Markets

Requirements gathering and project lead on initiatives to implement Straight-through processing (STP) for the Asset and Funding Trading Desks integrating Bloomberg Gateway and Bloomberg Portfolio Order Management System for trade tickets on securities and derivatives on the asset and funding desk to SunGard Middle Office Manager and SunGard InTrader applications. Charles River (CRD) gap analysis review sessions for order management selection. Charles River compliance module for Money Market fund and Rule 2a-7, eligible securities, ratings and alerts, warnings and exceptions documentation.
Managed project from initiation to close. SME for bank-traded Fixed Income products including Mortgage-backed securities, Asset-backed Securities, Equity options, Interest-rate and Credit swaps, structured products, TBAs, new issues, CMOs, agencies (FNMA, GNMA and FHLMC), Foreign Exchange and Interest-rate Swaps.
Effectively use PMO (Project Management Office) methodology to initiate, design, build, test, implement and close on capital budget expenditure projects, successfully and on time, while analyzing risk and issue impact on the project.

Straight-through processing project on Asset and Funding Desks. Requirements gathering. Lead review sessions. Instruments: Equities, fixed income, mortgage-backed securities (MBS), asset-backed securities (ABS), CMOs, CDO and the agencies FNMA, GNMA and Freddie Mac. Reference data workflows, FAS 133 for Hedge effectiveness testing, securitization and structured products and Derivatives Solution. Cedit derivatives, commodities, futures, options, FX.

Sungard InTrader, Wall Street Systems, Bloomberg TOMS, Bloomberg POMS, Reuters, QRM (Quantitative Risk Management), Charles River Trader, Charles River Manager, Charles River compliance. RFP author for Charles River OMS evaluation.

Fuji Bank of Japan, Chicago, IL FX Trading Desk Sr Business Analyst Jan 1999 – Jan 2002

Developed applications to track risk exposure, trading positions, algorithmic models designed to capture best execution; and Monte Carlo simulations, arbitrage, and spreads and due diligence for traders on the Foreign Exchange trading desk. Utilized Excel spreadsheets and real-time trading floor applications such as Devon, Sun-Gard, DTN, Bloomberg and Reuters to manage risk exposure for the foreign currency trading room. Client/server transactional platforms utilized.

Responsible for analysis of derivatives, futures & options, foreign exchange and securities risk management.

Communicated with trading partners through e-mail and spreadsheet reports for trade
reconciliation. Remitted S.W.I.F.T. data for trade balancing.

Developed reports and Excel queries of Fixed Income securities trading and processing with emphasis on US Government securities (both outright and Repo) for bank management. Responsible for P&L reporting, confirmation with trading partners, and end-of-day reporting of positions.

Performed analysis on historical trade position data, trading trends and tendencies and opposing trade positions for fraud detection and trading limit violations. Reconcile F/X, wholesale, spot, ask and bid, cash and Euro positions.

Clarified the responsibilities of both dealers and brokers regarding collateral substitutions in Repo transactions and promoted best practices in the Repo markets for the bank.

Chicago Mercantile Exchange Chicago, IL Apr 1994 – Jan 1999
Senior Business Analyst, EuroDollar, S&P, IMM and Agriculture Futures and Options pits Trading Floor Project Manager

Successfully led and managed included extensive report creation of out-trades, trading and security violations. Responsible for investigative reporting, trading floor access and security, creation of passwords and security profiles. Analyst responsible for client/server and transactional processing. Led team of enforcement and risk personnel.

Created applications to link databases and trading floor applications through Reuters, Devon, Dow- Jones Telerate, Bloomberg and Sun-Gard for real-time views of commodities, futures & options, precious metals, Eurodollar, Interest rate, S&P 500 Index and Commodity Index futures and options; Treasury Bonds futures, Treasury Bill futures, Grains and Agricultural commodities, foreign exchange and derivatives for trading floor enforcement and operations.

Developed applications to track risk exposure, trading positions, arbitrage, and spreads and due diligence for traders on the Foreign Exchange trading desk.

EDUCATION and CERTIFICATES

B.A., Communications Studies (Incl) University of Detroit-Mercy, Detroit, MI

Computer Science Certificate Program, Roosevelt University, Chicago, IL

De Paul University College of Commerce — Certificate, Financial Markets & Trading, Futures and Options Program, 1995

Series 3, (Commodities Brokers Futures Exam) National Association of Securities Dealers (NASD), 1995

Six Sigma Green Belt, 2005

Charles River Development, Charles River Investment Management System compliance certification, Burlington, MA 2005

Project Management Institute (PMI), Dayton, OH chapter, 2005
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EDUCATION AND AWARDS
De Paul University, Chicago, IL, 1993 – 1995
Certificate in Financial Markets and Trading in Finance – College of Commerce, 4.0 Grade Point Average
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BUSINESS ANALYSIS SUMMARY
Energy trading risk management

Endur
Energy Trading Risk Management (ETRM)
Futures
Options
Swaps
Commodity
Derivatives
Carbon
CO2
Emissions trading
EUA-CER
Financia
Green’s Certificates
EUA-CER
Physical deals
Metals
Trading module
Accounting module
Settlements
Risk module
Operations manager
Setting up Endur Instrument types
COMM-PHYS
COMM-SWAP
COMM-EXCH
COMM-FEE
PWR-FEE
CASH
FX
PWR-PHYS
PWR-SWAP-FTR
PSWR-TR-SPREAD
ENGY-B-SWAP
ENGY-SWAP
PWR-SWAP
COMM-TRANS
PWR-CAP
EO-CALL/PUT
PO-CALL/PUT-FIN-S
PO-GEN-CALL-D
ENGY-EXCH-FUT
ENGY-EXCH-OPT
COMM-STOR
COMM-EXCH
Gas Storage
Exchanges
Openlink Endur testing with Quality Test Center (Mercury Test Director)
Endur End-of-day calculations
MTM
Reconciliation of PnL between FO, MO and Back Office
Endur SQL and reports
Emissions
Power
Gas
Endur FX issues
Endur accounting issues
Endur accounting treatment of fees and costs
Endur deals and trading books
Endur cross commodity and cross-border trading
Endur implementation
Endur upgrade to newer versions
Endur deal templates
Endur pricing & valuation
Endur volumetic exposure
Endur simulations
Endur integration with gMotion, cMotion, Nucleus, SAP, Allegro, Triple Point, Entegrate

Structured transactions

Business Analysis
Requirements gatherings
Business Process Modeling
Requirements Specifications
Trade order management system work flow

Full trade lifecycle knowledge, particularly client-facing with Front Office, Middle Office and Operations, and Back Office accounting.

Strong record of project delivery.

Extensive experience of writing detailed business requirements.

Ability to bridge the gap between the business teams and IT, Development teams.

Excellent problem solving, communication and writing skills.

Experience of managing and coordinating multi-work streams, multi-team projects.

Trade capture and risk management system (Openlink Endur) as the system of record for Natural Gas financial and physical trading. The physical gas trading consisted of transport and storage deals. gMotion utilized for maintaining Natural Gas deals.
Created custom “end of day” calculations inthe simulation framework, and modified canned calculations in Endur for M-T-M, Cash Month, P&L granularity required by trading and risk control analysts.

Created custom instrument types in Endur in the user-defined interface which allows for separation of similar deal types. This allowed for an ENGY-SWAP to be traded execution venue agnostic, OTC or through ICE.

Experience with Forecasting, Scheduling, Nominations, Bookouts, Actualization, Volumetric Exposure, EaR, VaR.

Extensive data mapping and configuration for exchanges and exchange platofrms ICE, LCH, NYMEX, CME, EEX, ENDEX, NORDPOOL, NYMEX Clearport OTC, SGX ASIA CLEAR, ECX, Trayport, WEBICE for crude oil, petroleum products, carbon emissions, FFA freight, UK electricity, coal, tolling agreements, gas storage, forward spot (day-ahead and hour ahead) capacity and ancillary services. Brent and West Texas Intermediate Crude, natural gas, Heating Oil, gasoline propane, Nordic power, ERCOT, ISO’s and PJM.

Understanding of the Physical Operations of Oil companies products, and inventory tracking.

Very analytical and creative in solving data problems (i.e., data mappings techniques, standardizations, cross referencing approaches, etc.).

Very strong interpersonal skills and ability to interact and with business users.

International experience and Emerging markets
Sao Paulo, Brazil
Brussels
London
Zurich
Amsterdam
Frankfurt

United States Marine Corps
Navy Achievement Medal
Marine Embassy Duty – U.S. Department of State
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STRUCTURED TRANSACTION ENERGY TRADING CONTRACT

Assessment of Structured Transaction for energy trading contracts for FAS 133.

This analysis sets out to answer the following questions regarding a structured energy trading contract between an energy trading firm, the originator, and an operating company. The fictional company, let’s call it Aramaco, has concerns that the transaction may require FAS 133 accounting treatment. The analysis will briefly discuss the economic projection forecast and to determine if there is an embedded derivative or hybrid derivative inherent in the host contract:

Is the forecast reliable?
Is there a notional on the contract?
Is there an embedded derivative in the host contract?

Economic projection forecast background

The forecast is based upon geological formations and gas and oil history of the area. Technology has been developed and is widely used to both quantify the amount of gas within the shales, and also the permeability of the shale. Companies like Schlumberger and Halliburton are pioneers in this field. Aramaco provides the forecasts to prospective lease purchasers and use them as valuation of lease agreement terms.

The forecast is a tool utilized by prospective gas well lease purchasers to assess potential extraction capacities and inherent revenue from oil and natural gas extractions. These lease purchase are normally one to ten years in tenor. Purchasers are either bullish or bearish on their view of whether the wells or new drillings will actually deliver the extraction projections. They are willing to pay a premium for land leases with projected positive returns or history of successful transactions (piggy-backing); and seek to attain discounts with lease purchases deemed “wildcatting”, (an oil or natural-gas well drilled speculatively in an area not known to be productive).

Economic projection gas prices are based upon NYMEX strip prices (average of the daily settlement price of the next 12 months futures contracts) and constant cost parameters.

1. Is the forecast reliable?

The economic projection forecasts are mainly used in the industry for the valuation of selling properties, i.e., land leases in reservoirs, oil and natural gas fields.

Yes. Economic project forecasts are reliable. In reviewing the forecast document, the decline curve on the gross oil production is as expected. The decline falls off at an expected rate as the years go out, over fifty percent over the two-year period, from 350, 352 MMcf in year 2007 to 159,868 MMcf in year 2009; and levels out over the next 15 years, conforming to characteristics of the Barnett Shale Reservoir in Texas. The decline curves are extremely reasonable and credible, the production forecast falling off aggressively, showing a steadily declining production forecast.

Energy giants such as Reliant, a Houston-based supplier of wholesale and retail natural gas and electricity, have been using oil and gas production forecasts for years.

Yes. Economic projection forecasts are reliable. The forecasts are done by consulting firms and geological surveyors utilizing highly sophisticated and advanced technologies. The forecasts are mostly accurate widely used in projections of gas production in oil and natural gas wells. In Aramaco’s case, the reservoirs are Hidle-Deaver, in Johnson, Texas, the Williamson Lease of the Tres Vistas Prospect in Fort Worth and the Williamson lease in Parker, Texas, with Aramaco as the operating company, and having a working interest in, or having the right to sell.

2. Can we derive a notional amount?

Energy trading company buys natural gas from Aramaco at 98% of cost and sells it at 100% in the market.

Therefore, the notional = gross gas production purchased for re-sell minus margin.

We can arrive at a notional calculation using the following attributes:

Underlier – Natural gas
Notional amount, n (gross gas production purchased from Aramaco and delivered for re-sell = purchase price – margin)
Delivery price, k (98 – 2%)
Settlement date, s – when natural gas is delivered, sold in market

Is there an embedded derivative in the host contract?

A purchase and sale contract with executory treatment may contain embedded derivatives.

Embedded Derivative assessment

Identifying and quantifying embedded derivatives is very complex. According to the Financial Accounting Standards Board (FASB) and statement 133, the following attributes, inherent in the Aramaco transaction, may qualify as an embedded derivative to be separated from the host contract and or meet the definition of a derivative:

There is no cost of carry. All imbalances fall on the Aramaco/Energy Transfer gathering agreement, the host contract. Criteria met for definition of a derivative.

The Aramaco transaction is a purchase and sale contract with executory treatment. Assess for embedded derivatives.

The contract is predominantly based on sales or service revenues of one of the parties. Assess for embedded derivatives.

The embedded derivative causes modification to a contract’s cash flow, based on changes in a specified variable. Assess for embedded derivatives.

There is a commodity-linked “tariff structure”. Assess for embedded derivative.

The contract allows us to recoup all fees associated in marketing the Aramaco gas. Criteria met for derivative definition.

The pricing formula is an embedded derivative because it changes the price risk from the gas price notional (gas gross x gas price minus margin) to the strip price, or spot price (see notes).

The underlying is a variable, price or rate that is related to an asset or liability, commodity price (price of natural gas, in this case)

Net settlement provision – there is an explicit or implicit net cash settlement provision in the purchase or sale contract.

No initial investment. No (or small) investment at inception. No initial net investment or a smaller investment than required to own the underlying. Criteria met for derivative definition. Contract agreement is riskless for Energy trading company.
The notional amount and underlying determine settlement amount.

The contract has a pricing formula other than the market price of the natural gas itself.

Notes:

Embedded derivative must be separated from the host contract, recorded at “fair value” and accounted for separately in the balance sheet (bifurcation)

Natural gas spot prices – pegged on Henry Hub, Louisiana (NYMEX Natural Gas Futures Near-Month Contract Settlement Price)

Henry Hub spot prices are reported in dollars per million Btu.

New York City Gate Spot

Natural Gas ($/MMbtu)

Natural Gas spot price – represents natural gas sales contracted for next day delivery and title transfer at the Henry Hub Gas Processing plant.

©2009 by Phillip Green,
Senior Business Analyst, Consultant
Derivatives and FAS 133 Hedge Effectiveness Testing
Energy Trading Risk Management
Derivatives Trading Desk©®™

]]> http://derivativestradingdesk.wordpress.com/2009/02/15/embedded-derivatives-in-structured-transaction-energy-contracts/feed/ 0 derivativestradingdesk http://derivativestradingdesk.wordpress.com/2008/11/07/credit-default-swaps-arbitrage-on-the-yield-and-curve-with-pricing-like-a-bond-by-phil-green/ http://derivativestradingdesk.wordpress.com/2008/11/07/credit-default-swaps-arbitrage-on-the-yield-and-curve-with-pricing-like-a-bond-by-phil-green/#comments Fri, 07 Nov 2008 20:31:00 +0000 derivativestradingdesk http://derivativestradingdesk.wordpress.com/2008/11/07/credit-default-swaps-arbitrage-on-the-yield-and-curve-with-pricing-like-a-bond-by-phil-green Continue reading →]]>

Arbitrage for basis points using the day count and basis spread to determine yield and trade.  Similar to my previous blog with a arbitrage play between Petrobras (PBR) and Bunge soy crush.

Current Yield

Annual Dollar Interest Paid

= ————————————— *100

Market Price

Yield

=(Future Value     1/n

—————– -1

Purchase Price)

…then go to a Bloomberg screen and look for your Yield Analysis (Disclaimer:  screen below and arbitrage example for demo purposes only, not a trading strategy suggestion).