Quantifying and managing uncertainty
Intuitively, risk management is beneficial because acute price spikes occur roughly every 2½ to 3 years (e.g. 2008, 2005, 2001, etc.), due to random and unpredictable reasons. Rapid changes in prices, both up and down, can have significant impacts on consumers, utilities, energy companies, and industrial users. Many understand this well, and also understand that the negative impacts of high prices far exceed the benefits of comparatively low prices. It is therefore predictable that each price spike gives new life to the question of whether to hedge (or to hedge more). When the question of whether to engage in risk management via hedging comes up, it is typically paralyzed by the following paradox:
- If we don’t hedge, and the market goes up (a lot), we have a problem, but…
- …if we hedge, and the market goes down (a lot), we have a problem.
Left unresolved, risk management will always be viewed with a “rearview mirror” mentality - in which the standard is whether the hedged positions have settled favorably (i.e., “beat the market”) or not.
Through the Power of Integration, we offer expert advice and support in Risk Assessment, Hedge Program Design & Evaluation, Hedging Advisory Services.