Risk Management

Highlights

Risk Management is the application that allows energy market traders to industrialise the risk policy. This application, based on the best methods, measures the possible impact of risk factors deriving from the fluctuation of prices of commoditites and of the national market prices. This AAA provides business users with all the results of an Analytic Tool, but in an easily accessible manner; this application is also highly integrated in Risk Management company processes.

Business Context

Energy companies have multiplied their types of offers to customers, with an increase in fixed price options, index-linked offers based on specific customer needs, or offers as discount on authority tariff; this has resulted in a growing asymmetry between formulas used in the sales portfolio and those used in the purchase one. The awareness of the price risk financial exposure, which was already growing in the market due to the competitive context, is now very topical. The volatility of commodity quotations has coincided with the volatility of the prices of the European market and this has strengthened the demand for tools and technologies that can measure the price risk in a broad sense, cover it and safeguard the margins.

ì4C Application

It starts from the open position, i.e. the volumes sold which are not financially covered by bilateral purchases and which shall therefore be purchased on the national platforms. This determines the national price risk exposure. Volumes covered by contracts determine the exposure to the volatility of commodity prices included in the indexing; obviously this exposure is net of the corresponding positions of the opposite sign, given by the pricing formulas of purchase contracts. The methodological heart of the process is very complex: volatility estimation methods, Montecarlo simulation algorithms, synthetic risk indicators such as VaR, make it possible to summarise the exposures and possible future trends of raw materials (or of the single national price) into synthetic indicators that measure the share of profits exposed to risk. When an exposure, which is outside the parameters set, is identified, a simulation of coverage operations is carried out (by formula, commodity, portfolio or distribution) to identify the most suitable choice to bring the indicator towards a safe value.

Business Pain – Key Features

  • Calculate the financial exposure of the physical portfolio
  • Net exposure: volumes by purchase and sale formulas and breakdown per commodities
  • Commodities management
  • Map the hedging contracts and consolidate the portfolio’s financial position
  • Management of hedging contracts: SWAP contracts and CfD and IDEX contracts for power and commodities 
  • Financial Open Position Report: Self-hedging and final position after portfolio hedging
  • Measure the risk level and Identify the best strategy to cover open positions
  • Montecarlo simulation: Commodities and Market Prices
  • Hedging What If: Formula/commodities SWAP, CfD, Energy Derivatives