navigant qfas april 2015

Quantitative FinanceAdvisory Services

April 2015

Table of Contents

Section 1 QFAS

Section 2 Advisory Services

Section 3 Technical Competencies

Section 4 Why Navigant ?

Section 5 Practice Leadership

Section 1QFAS

What is Quantitative Finance ?

• Mathematics meets Finance

• Probability & Statistics

• Linear Algebra

• Stochastic Differential Equations

• Numerical Methods

• Programming + computing power and speed =

• Linear & Non-Linear equations

• Interpolation & Optimization

• Binomial & Trinomial models

• Power Laws

• Finite Difference methods

• Monte Carlo Simulation (“MCS”)

Applications

• Corporate finance

• Derivatives pricing

• Financial regulation compliance

• Portfolio management

• Risk management

• Structured products

• Trading

• Valuation of options

• Hedging

What QFAS is not…………………

It is not Accounting,

It is not Business Valuation,

It is not Investment Banking,

It is not theoretical, it is scientific, and

Above all, it is NOT a cure for poor management, fraud, and/or weak leadership.

Quantitaive Finance must be coupled with qualitative, right-brain

thinking to be most effective.

Section 2Advisory Services

Typical Advisory Services

• Earnings and cash flow sensitivity and volatility analysis,• Cash flow forecasting and optimization,• Market risk assessments,• Pricing reviews and optimization studies,• Client profitability optimization and segmentation,• Quantitatively-driven operational transformation projects,• Hedging strategies,• Model validation,• Curve construction,• Limits setting, testing, & consulting,• Model risk assessment, and• Structuring & valuation of exotic derivative instruments.

Sample Applications

Fourier Analysis

Navigant can assist Clients to develop mathematical methods to decompose data into specific frequency elements. This technique can be used to analyze and price daily, weekly, and monthly variations in electric power demand, for example.

Laplace Transform/Moment Analysis

Navigant can assist Clients to develop an appropriate mathematical method, and model, to decompose data into its statistical moments, such as distribution, kurtosis, and skewness. This capability allows for superior risk models that go well beyond traditional VaR, CFaR, or mVaR; and advance the ball towards a better grasp of “Black Swan” events, which are the most devastating events of all.

Sample Applications cont’d

Differential Equations & Multivariate Regression Analysis

Navigant can assist Clients with solutions for equations that have first, second, and higher order derivative relationships across multiple variables. This can be essential in determining how various drivers impact outputs. For example, this is the best way to properly model wholesale refining margins.

Factor Analysis

This is a statistical method that can be used to determine key unobserved and/or underlying correlations between several variables. For example, for a retail electric provider, Factor Analysis can be used to do a more accurate job of quantifying customer profitability analysis.


Error Propagation

Navigant can assist Clients with the development of uncertainty propagation models, in order to determine the specific impact of variable variances, correlations, and volatilities. This is useful in doing more sophisticated EBTIDAX or cash flow volatility analysis based on the uncertainty of drivers in the upstream oil & gas business.

Integer Optimization

This is an optimization technique that uses discrete constraints. It is easier to optimize continuous parameters, but discrete constraints (like volume or capacity) complicates optimization models and makes them slow to run. Plant optimization and discrete market simulation (as in power markets) are two examples of when this technique can be effective.


Stochastic Probability Matrices

In simple terms, this service means that we help Clients to list and then map out every possible event that might occur. Then, we work to assign a probability to each of them. This work is coupled with expected valuations per event, and is very useful in the analysis of commodity markets, cross-correlation analysis for bank liquidity, as well as working capital optimization.

Stochastic Processes & Monte Carlo Simulation

Using software, or coding in Excel, Navigant can build simulation models using random variables to determine their impact on important financial and operational metrics. Specifically, hedging and trading strategies are well suited to this approach.

Stochastic Market Analysis

XLS

SQL DATA

MCS

SQL OUTPUT

Stochastic Market Analysis

How It Works• Using SQL Server, we build as detailed a market model as possible of all

market inputs, which impact the Client’s operations (Midstream Crude Oil, Polyethylene, ERCOT, etc.),

• Also using SQL Server, we prepare an output data file to store all market data outputs,

• MCS is used to run simulations of various market strategies, pulling/pushing on data in the SQL data bases, and then

• XLS is used to prepare summary output tables and metrics for leadership discussions.

Applications• Test M&A deals and their market impact,• Test pricing strategies,• Shock the market, and • Quantify strategy and test its valuation impact.

Section 3 Technical Competencies

Software Competencies

Excel +VBA Python R C++ MATLAB Mathematica Crystal Ball @RISK

Technical Competencies

Fixed-income products

• Fixed and floating rate instruments, bonds, swaps, caps and floors, FRAs and other delta products.

• Yield, duration and convexity calculations.• Bootstrapping to build up the yield curve from trading bonds and swaps.• Curve stripping - Using reference rates & basis spreads, OIS discounting and dual-curve

stripping, cross-currency basis curves, and calculating the cost of funds.• Interpolation methods, including piece wise constant forwards, piece wise linear, cubic

splines, smart quadratics, quartics, and monontone convex splines.• Stochastic interest rate models, one and two factors.• Model Calibration - Fitting the yield curve in simple models.• Data analysis - Examining interest rate and yield curve data to find the best model.

Technical Competencies cont’d

Probabilistic methods for interest rates

• Using the Heath, Jarrow and Morton model, & modeling the yield curve.• Determining risk factors of yield curve evolution and optimal volatility structure.• Pricing interest rate derivatives by Monte Carlo Simulation.• The Libor Market Model, calibrating the reference volatility structure by fitting to caplet or

swaption data.• The SABR Model - Managing volatility risks, smiles, local volatility models, using the

SABR model and hedging stability.• The Arbitrage Free SABR model - Reduction to the effective forward equation, arbitrage

free boundary conditions, comparison with historical data and hedging with the SABR model.


Credit risk and credit derivatives

• Structural and Intensity models used for credit risk.• CDS pricing, market approaches, and implied default probability, recovery rates, & default

time modeling.• Synthetic CDO pricing, using the default probability distribution, default correlation,

tranche sensitivity, & pricing spreads.• CDO/copula modeling using XLS spreadsheets.• Correlation and state dependence analysis.• Credit Valuation Adjustment (“CVA”): CVA exposure, modeling exposure, collateral,

wrong way risk & right way risk.• Risk of default - The hazard rate, the implied hazard rate, the stochastic hazard rate and

credit rating, & capital structure arbitrage.• Copulas - Pricing basket credit instruments by simulation.• Statistical methods in estimating default probability - Ratings migration, transition

matrices, and Markov processes.


Stochastic volatility and jump diffusion

• Modeling and empirical evidence, pricing and hedging, mean-variance analysis, the Merton model, jump distributions, expectations and worst case analysis.

• Non-probabilistic models - Uncertainty in parameter values versus randomness in variables, & nonlinear equations.

• Static hedging - Hedging exotic target contracts with exchange-traded vanilla contracts, optimal static hedging.

• Advanced Monte Carlo techniques - Low-discrepancy series for numerical quadrature. Used for option pricing, speculation, and scenario analysis.


Energy derivatives

• Speculation using energy derivatives and risk management in energy derivatives.• Cointegration - Modeling long term relationships, and statistical arbitrage using mean

reversion.• Dynamic Asset Allocation - Convexity management, stochastic control, multi-period

projections, utility maximization, and the impact of transaction costs.• Forecasting by using option prices - Volatility forecasting using historical asset prices and

current option prices.• Inserting option prices into ARCH models, & typical ARCH results.• Density forecasting - Criteria for good forecasts, estimating risk-neutral densities from

option prices, & risk-neutral to real-world densities.

Section 4Why Navigant ?

Navigant Consulting, Inc.

Business Description

Navigant Consulting, Inc. is a specialized, independent advisory firm that supports companies, lenders, institutional investors, legal counsel, and government agencies. The company focuses on entities and industries facing the challenges of uncertainty, risk, distress and significant change, and on the issues driving these transformations.

Ticker NCI (NYSE)

2014 Revenue $859.6 million

Professionals 3,600+

Headquarters Chicago, IL

Senior Management

■ Julie Howard, CEO and Chairman, Navigant

■ Cindy Baier, CFO and EVP

■ Richard D. Hitt, Managing Director, Head of Navigant’s Corporate Finance Practice

Navigant Consulting, Inc. (“Navigant”)

NCI’s 2,500+ professionals maintain a presence in 45 cities internationallythroughout North America, Europe and Asia, including a significant concentration of

resources in Chicago, Houston, London, New York, and Washington DC.

Comprehensive Energy Complex Coverage

Commodity Hedge Funds

Energy Services

Energy Trading & Marketing

LNG

Oil and Gas - Upstream

Oil and Gas – Midstream

Power Generation, Transmission, & Distribution

Refined Products

Renewable Energy

Our Strengths

Broad and deep expertise across the Energy Complex We have consulting, banking, and corporate experience in diverse financial and commodity

markets, in addition to valuation & financial reporting technical capabilities. Our experiencedteam includes MBAs, CPAs, CFAs, CBAs, ASAs, CAIAs, and MAI’s.

We are a one-stop shop, as we do complex commodity derivatives valuations alongside ourbusiness and corporate valuation work.

Collaborative process While our opinions are independent, you are involved throughout our process, because you

know your investments better than anyone. We want to understand your thinking, and we wantyou to understand ours.

Thoroughness and accuracy We give you more than just the conclusions. We give you thoroughly supported, accurate

valuation reports.

Integrity We are only interested in getting to the right answer, employing generally accepted valuation

principles.

“Trusted Advisor” to our clients Our clients view us as business partners, working together to establish best practices in valuation

and transaction work as competitive advantages for their firms.

What makes Navigant unique?

Accepted in the Marketplace

Our work has supported KPMG, PwC, Deloitte, E&Y, BDO, GT, and other audit firms’ technical & audit staffs, undergoing detailed review of our fair value analyses for financial reporting and tax purposes.

Our work has been reviewed and accepted by the SEC in numerous filings.

We have extensive experience defending our valuations before the IRS(including Tax Court) and other tax and regulatory bodies.

Our senior professionals have performed technical reviews during their tenure at the major accounting firms. We maintain continuing professional relationships with current reviewers at these firms.

Our methodologies and findings have been presented to, and accepted by numerous rating agencies, qualified institutional buyers and certified investors.

Our professionals have published and spoken extensively on valuation topics as they pertain to the investment community.

Trusted Advisor

Service

A combination of…..

… resulting in a “Trusted Advisor” relationship creating valuation as a competitive advantage.

Flexibility

Collaboration

Accuracy

Thoroughness

Timeliness

Integrity

Expertise

“Excellent communication”

“Very responsive from a process and analysis standpoint”

“Exceeds expectations in response time “

“Investors have reached out to Navigant on methods and assumptions and have only provided positive feedback”

“Meets all schedules and deadlines”

“Provides creative ideas and suggestions”

References available upon request

What our clients say about us….

Navigant vs. Big 4

• We have a diverse skill set; not just CPAs,

• We have corporate industry experience, they do not,

• QF is a discipline based on Applied Math, Economics and Finance, not on Accounting, and

• We are not limited by rules-based thinking and checklists.

Navigant vs. Wall Street

• We do not have trading and marketing desks, so we can be more objective,

• We understand regulatory and statutory valuation, bankers sometimes do not, and

• We understand all of the accounting and tax rules that are unique to the Energy Complex.

Navigant vs. Boutique Firms

• Our balance sheet and brand stand behind our work,

• We can deploy a wide variety of resources globally,

• We do not have to outsource or sub-contract anything, we are a one-stop shop,

• Small firms cannot be counted on to be there with you through all of your regulatory challenges, and

• Energy boutiques do not possess the quantitative finance horsepower needed to be effective.

Section 5Practice Leadership

Thomas J. McNultyDirector

Navigant Consulting909 Fannin St. Suite 1900Houston, TX 7010Tel: 713.646.5078Cell: 832.472.3717

[email protected]

Professional History

Navigant Consulting, Inc.

Sirius Solutions LLP

Plains All American

Duke Energy

Enron International

US Foreign Service

Brown Brothers Harriman

Education

M.B.A. (Accounting & Finance), Kellogg, Northwestern University

B.A. (History), Yale University

Tom McNulty is a Director in the Valuation & Financial Risk Management practice of Navigant Consulting, Inc. His specialties are transaction and commercial analytics, valuation, and risk management. Specifically, his practice offers clients a unique combination of strategic, financial, and transactional advisory services. Mr. McNulty is based out of the Houston office, and he has more than 20 years of financial advisory and related experience work.

As a consultant, Mr. McNulty has advised clients drawing on his valuation, transactions, risk management, treasury and international credentials. Specifically, he has assisted with the valuation of securities, business units, acquisition targets, derivatives, and equity incentive plans. In industry, and as an advisor, he has worked on more than $38 billion in MD&A deals and has valued more than $8.5 billion notional in futures, options, and other derivatives.

In his current role at Navigant Consulting, Mr. McNulty directs engagements governing acquisitions and divestitures throughout the energy complex, including upstream oil & gas, midstream, merchant power, renewable energy, energy services, trading and marketing, as well as LNG. He also performs valuation work for clients with complex equity, fixed income, and commodity derivative instruments.

Recent assignments Mr. McNulty has led include:

• Provided ASC 815 assistance to several energy companies related to their derivatives portfolios.

• Rendered a comfort opinion to a energy hedge offering a new midstream oil & gas fund.

• Rendered an opinion to an oilfield services company for a related party transaction.

• Directed ASC 805 project for the reverse merger of two private drilling companies.

• Provided ASC 718 valuation assistance to a publicly traded oilfield services company for its restricted stock units and stock options.

• Delivered ASC 718 valuation assistance to a privately held upstream oil & gas company for its equity incentive plan.

• Led the valuation work on the GP interest in a privately-held midstream company for a large litigation engagement.

Resumes

mailto:[email protected]

navigant qfas april 2015

Economy & Finance