Risk Assessment

A risk assessment is a quantitative expression of the impacts to financial objectives of energy (or other commodity) market volatility.  The assessment facilitates an understanding of exposures and provides for concrete objective-setting.  Pace Global develops risk assessments by propagating forward commodity prices based on volatility and correlation factors observed in the futures markets, and applying those propagated prices to client specific volumes and pricing indices.  The risk assessment includes analysis of client portfolios with respect to open (i.e., un-hedged) volume exposures, existing hedge positions, commodity-specific contract terms, financial covenants, customer commitments and factors in temporal correlations. This provides a clear view of potential cost, rate, revenue or margin migration for all forward years if left un-hedged to settlement (i.e., the ultimate delivery requirements).  Using Monte Carlo simulation, Pace Global propagates thousands of potential price paths to derive a probabilistic distribution of cost outcomes, as illustrated below.

Risk Assessment – A Probabilistic Distribution of Outcomes

In order to understand and set realistic hedge program objectives, it is important to understand the range of energy commodity price outcomes and therefore commodity costs to which our clients are exposed.  Once the range of risk is quantified, a solid context is available for assessing hedging decisions and reasonable objectives can be set.

For more information, please contact:
 Jim Diemer at 703.818.9100 or via email.