Energy commodities overview

In today’s complex energy markets, pricing analysts and risk managers need reliable data and analytics in order to make better decisions. MSCI’s FEA® @Energy suite offers robust pricing, hedging and risk analytics backed by expert research, while providing clients flexible reporting options.

Acquired by MSCI in 2004 as part of Barra, Financial Engineering Associates (FEA) was founded in1989 when Berkeley professor Mark Garman (co-author of the Garman-Kohlhagen model for FX options) saw the need for robust software to help price complex derivatives in the booming energy markets.

Since then, we have modeled more than 225 instruments based on 59 pricing models and 20 risk management modules designed to help clients with the valuation and hedging of energy and power derivatives.  These tools can also help clients with their optimization and valuation of real assets, and with their risk management of portfolios that contain energy and commodity trades. 

Contact our dedicated consultant team to learn more about our energy and commodity analytics offering. 

Pricing and hedging of derivatives

MSCI’s FEA @Energy software for energy-related derivatives is used by 100+ clients worldwide. Traders, risk managers, originators, as well as quantitative pricing analysts supporting their front offices use these tools to help them in their determination of prices and hedges of a wide range of derivative contracts, from basic to complex.

The @Energy software is offered as an Excel add-in together with customized spreadsheets and a global team that includes PhD-level consultants ready to help clients with modeling of sophisticated derivatives.  In addition to Excel templates, clients may also license these functions as C++ libraries, which can be integrated into proprietary trading and risk management systems.

The  suite of functions available in @Energy and the corresponding C++ libraries are used by global oil & gas exploration companies, energy merchants, power marketers and utilities, but also by hedge funds, banks and agricultural and food companies who trade energy and soft commodities.

The pricing models offered  include, but are not limited to, the following derivatives: strips of American/European options, forward-starting options, swaps, swaptions, exotic swaps, Asian options, barrier/digital options, spread options, heat rate options, calendar spread options, crack options, best of options, standard and complex swing contracts, compound options, and structured products. The @Energy software offers clients the ability to customize pricing models with user-defined parameters (such as volatilities, correlations, forward curves); it also allows the parameters to be automatically estimated from historical data.

Valuation and hedging of real assets

Clients may use tools available in @Energy to help them value and determine hedges for the following energy-related real estate assets: natural gas storage facilities, power generation plants, gas transport pipelines, power transmission, battery power storage, windmill dispatching, solar, nuclear, hydro generation, pump storage, oil storage, coal storage, production processes such as hog and canola crushing, petrochemical and oil cracking, and shipping (optimization) challenges.

Similar to the pricing software, these modules come as highly configurable Excel templates, used by 100+ customers worldwide.  Some can be integrated as C++ libraries into proprietary trading systems to inform our clients on hedging and trading decisions optimizing their assets, and some are developed to address specific needs by our research team. 

Risk Management tools for energy and commodity portfolios

The FEA VaRWorks tool is an Excel-based model used by global clients in the Energy sector to help them manage market risk in commodity and energy portfolios. The range of contracts covered includes the standard and complex variations often found in the Energy industry. VarWorks also comes as a C++ library, FEA VaRLib, which can be integrated into proprietary risk management systems.

A separate tool often used in conjunction with VaRWorks is FEA MakeVC, which constructs the volatilities and correlations from historical data (provided by the user) and covers both constant maturity futures and quoted fixed expiry futures as risk factors. VaRWorks calculates VaR, contribution to VaR (historical, parametric and Monte Carlo), and also counterparty potential future exposure (PFE). Like all of the FEA tools, VarWorks and MakeVC are fast and agile, capable of handling large portfolios with up to 100k trades.

MSCI has made significant investments in integrating FEA valuation models into RiskManager, our multi-asset class framework for enterprise-wide risk management. Used by major banks, hedge funds, asset owners and asset management companies, RiskManager is widely used for VaR, stress testing, sensitivity analysis and other risk management use cases, with close to 2.2 million time series of market risk factors. RiskManager is scalable enabling firms to perform ad hoc risk reporting as well automated, enterprise-level reporting.  

The integration of the FEA functions with RiskManager allows companies that trade oil, gas, power, soft commodities, basis trades, and agricultural commodities to manage the risk of their exposures with a seamless toolkit.

Contact our dedicated consultant team to learn more about our commodity oriented risk management offering.