risk management Flashcards
how do you secure the future gross margin even though prices for coal and for power prices are unknown?
hedging : energy trading allows to transfer market price risk. Reduces both opportunities and risks.
mark-to-market valuation: for assessment of a still one position
consequences of the liberalisation
- end of demarcation, phase-out of classic full-supply contracts
- dev. wholesale markets -> price signals
- competition in production and sales, customer and generation assets exposed to markets
- new market players with ind. strategies
what does impact the profitability of an energy utility?
what has broader the risk utilities?
- volatility of market prices, thus is energy market price risk.
- dev. of energy markets, however it opens changes and opportunities as well
means for active risk management
trading
risk management definition and ways to deal with risk
risk management = measures in order to analyse, manage and control the risk position.
ways: active (avoidance, reduction, transfer)
pasive (diversification and detention)
types of risk (energy utilities context)
- financial
- basis risk: risk of loss due to an adverse move of expected price differential between 2 prices (2 products highly correlated) -> as long as the correlation is stable - trader is hedged
- legal (loss because a contract my not be enforceable> can be reduced by standardised contracts)
- operational (risk of error or omissions in the processing and settlement of financial and physical trades)
- tax (intern. trading opera, changes in tax regulations)
why is the implementation of a central trading and portfolio management unit?
task of reporting and managing risk is simplified, since all relevant info is centrally available for reporting, analysis and management, and thus the business units focus on its key competencies and tasks
what does the assessment of market prices require
a modelling of price process for all commodities( power, coal, emissions, gas, foreign exchange rate) and its correlations -> example: total risk of a long position in power and short position in coal is lower than the sum of both individual risk due to the positive price correlation of both prices ( natural hedge)
how do you build a portfolio of risks impacting the gross margin
real world contracts into separated products and then conversion into tradable products eg: Gas delivery (contract) : fue oil and gas oil (separated products) converted into ICE Brent crude oil (tradable product)m
what does a VaR of - 10 Mio EUR with a 95% confidence level and a holding period of 5 days tell us?
The likelihood of a portfolio loss of 10 Mio within the next 5 trading days is less than 5%
parameters of the VaR
Holding period and confidence level
how do yo measure the price risk?
How do you simulate the price processes? and the input parameters
- modelling of future prices processes
- stochastically -> Gbm
- starting price = current market price and standard deviation = current volatility
what is the result of portfolio and risk modelling?
a daily distribution of the gross margin (generation, trading a retail)
- left: 5% prob. that revenues will be lower than z-x mio.
- right: 95 % prob. that the revenues won’t be higher than y+z Mio
=> by hedging the probability distribution becomes more narrow. As a consequence both risk and opportunities are reduced.
what are the elements of the risk management in the energy sector?
- portfolio management and trading: measurement and management of opportunities and risk (active management)
- > identify, quantify and measure risks
- > report risks and make them transparent on corporate level
- >manage risk according to the corporate risk strategy - Risk controlling: surveillance
to dos of trading unit
- daily reporting to the risk controlling
2. monthly reporting to the risk committee
