With a good risk management implementation plan, energy firms can make better trading decisions and boost profit.
FREMONT, CA: The concerns about the costs can curb the initial enthusiasm for deploying the risk management system into energy trading. Since enterprises do not perceive risk management as a classic money maker, the potential costs of deploying a complex system can seem frightening. The ambitious plan is thus often simplified, and several requirements are gradually abandoned.
The company interested in energy trading must know the importance of risk management and perceived it not only through its costs. Companies realize that this perspective is insufficient. The calculation models are becoming robust, the calculation time rises, and the information channels are not flexible and clear. All this results in a higher error rate. In some cases, the simplified operations may lead to incorrect business and trading decisions resulting in financial loss, which conflicts with risk management's critical idea – avoiding and preventing loss.
The risk management system must comprise information about all types of commodities. The customer must have a clear understanding of the sources of risk and include only commodities that scale the risk exposure. The trading firm must also consider the availability of public information concerning the various types of commodities in its portfolio. If there is no public data about the commodity and it scales the risk exposure, it is very hard to evaluate it by the system. The firm should think about the method to add the given commodity into the final risk profile.
If the firm has been leveraging some sort of risk management before deploying the ETRM system, or if it is a part of a bigger corporation, it most probably has its well-known, established, or prescribed risk management metrics. For continuity, it is thus essential to deploy these metrics into the new system. Changing the metrics is smart only if the sophisticated possibilities of the ETRM system offer a significant advantage by leveraging a different set of metrics.
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