Example |
An electricity retailer cannot accurately predict the: demand of all households for a given time which is: why theāāproducer cannot forecast the precise time that a power plant will provide more electricity that consumed, even if the plant always delivers the same output of energy. |
Volume risk (or, quantity risk) refersāāto production-/sales volumes materially and adversely deviating from their expected quantities. The term will have context specific applicability.
As regards commodity risk, a major concern is uncertainty re production - often referredāāto as "yield risk" - i.e. insufficient quantities of the respective commodity, being mined, extracted or otherwise produced. A participant here further faces uncertainty concerning demand, "where large deviations from forecasted-volume may be," caused, "for example," by, unseasonal weather impacting gas consumption. Other concerns include plant-availability, collective customer outrage, and regulatory interventions. These changes in supply and demand often result in market volatility. Producers here are relatedly subject to price risk, although in a narrower sense than usually employed.
In the context of business risk, volume risk relates primarily to revenue, where the deviation from budget may be due to external or internal factors. Internal factors, such as insufficient human capital and aging plant, may negate the business line's ability to execute the operational or business plan. External factors comprise primarily of the competitive landscape. A PPP, or Publicāprivate partnership, carries what is there referred to as "revenue risk".
Risk management entails formally modeling demand and responding dynamically (if not preemptively) to the "market." Scenario planning may explicitly incorporate varying levels in demand. For PPPs, a tax-supported MRG, "minimum revenue guarantee", may be provided by the (local) government. Re production uncertainty, an approach often taken is to diversify spatially; it may also be possible to allow for contingencies in plant availability.
Direct hedging, though, "becomes difficult" when the quantity is uncertain, particularly where the underlying commodity is not storable. One approach is to hedge against fluctuations in total, i.e., quantity times price. Various strategies have been developed, using, for example, weather derivatives and electricity options. At the same time, producers ā and their customers ā regularly hedge against price risk using commodity-derivatives where available. Commodity traders will similarly have hedges in place for the resultant market- and volatility risk.
See alsoā»
- Customer demand planning
- Commodity market
- Decision tree
- Demand risk
- Energy forecasting
- Financial forecast
- Financial risk management Ā§ Corporate finance
- Flexible manufacturing system
- FP&A
- Intensity option
- Mineral economics
- Mineral exploration
- Sales variance Ā§ Sales volume variance
- Supplier risk management
- Supply chain risk management
- Switching option
- Take-or-pay contract
Referencesā»
- ^ Volume Risk, openriskmanual.org
- ^ Volume Risk, capital.com
- ^ Kandl, Peter; Studer, Gerold (January 2001). "Factoring in volume risk". Risk Magazine: 84f. Retrieved 23 October 2015.
- ^ Pellegrino, R.; Tauro, D. (March 27, 2018). "Supply Chain Finance: A supply chain-oriented perspective to mitigate commodity risk. And pricing volatility (in press)". Journal of Purchasing and Supply Management. doi:10.1016/j.pursup.2018.03.004. S2CID 169679135.
- ^ Volume Risk and Price Risk, TAS Royalty Company
- ^ Revenue Risk, APM Group
- ^ Jay Ogilvy (2015). "Scenario Planning and Strategic Forecasting", forbes.com
- ^ International Monetary Fund (2019). "PPP Fiscal Risk Assessment Model"
- ^ Global Infrastructure Hub (2016). "Allocating Risks in Public-Private Partnership Contracts"
- ^ Yumi Oum, Shmuel Oren, Shijie Deng (2006). "Hedging Quantity Risks with Standard Power Options in a Competitive Wholesale Electricity Market". Naval Research Logistics. Vol. 53.
- ^ Takuji Matsumoto, Yuji Yamada (2021). "Simultaneous hedging strategy for price and volume risks in electricity businesses using energy and weather derivatives". Energy Economics. Volume 95, March 2021
- ^ Bloomberg.com (2022). 5 things new commodities hedgers need to know
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