Service Type: Marketing, Procurement and Trading
Project: Commodity Value-at-Risk and Risk Management C/ETRM Mandate
Context:
A large privately-held trader and supplier of renewable fuels and natural gas products relied on separate and distinct commodity/energy trading risk management (C/ETRM) systems to record trades, activities, portfolios, and generate basic risk metrics and positions. Unfortunately, the Value-at-Risk (VaR) and exposure values were not integrated from these systems, resulting in an inflated representation of total exposures and overlooking the potential benefits of off-setting positions across different commodity types and timeframes. The produced exposure metrics were simplistic and failed to accurately depict the risk profile. Consequently, the trading, risk, and executive teams lacked the requisite risk management tools to effectively oversee their operations.
Approach & Results:
Our client sought a comprehensive solution that would merge their distinct commodity portfolios (renewable fuels and natural gas) and associated exposures into a unified VaR framework for the risk management, trading, and executive levels. Our approach entailed exporting and consolidating data, establishing a standardized trade instrument methodology, and creating a comprehensive book reference map. This allowed for the generation of integrated exposure results for the entire portfolio and its subsets, tailored to meet the needs of trading, risk management, and senior leadership. We introduced advanced VaR measures such as time-weighted (exponentially-weighted), historical VaR, and incremental VaR (capturing VaR changes resulting from new trades or portfolio adjustments) to enhance risk assessment capabilities. Additionally, we provided the trading team with sophisticated, customizable drill-down tools to enhance decision-making, analysis, and positioning.
As our client’s commercial activities expanded opportunistically as our integrated risk management application accommodated new commodity types, transactions, and opportunities. Through our concerted efforts, we facilitated a transformative shift in our client’s renewable fuels and natural gas operations, ensuring not only compliance with risk and financial requirements but also driving improved commercial performance. Our strategies laid the groundwork for sustainable growth and operational resilience within a dynamic market environment.
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