May 2012 - Business Briefing Series: How relevant is VaR for energy markets?

23/05/2012

In this 2nd paper of our Business Briefing Series, we discuss how, despite its many limitations, Value-at-Risk (VaR) is still the most commonly used risk profile measuring tool in the energy industry, and present why this risk metric if used in isolation could have serious consequences.

Energy organisations require risk metrics that provide well informed decision-making to enable them to apply appropriate hedges, absorb market volatilities and price shocks and optimise their operations to improve profitability.

However, in practice, risk management for many organisations is typically limited to calculating a VaR metric - and often this is the simplest form of VaR, called Delta or Analytic VaR.

Given the increasing focus on the measurement and reporting of risk, as well as the increased regulatory and rating agency oversight in which energy organisations now have to operate, this approach needs to be reassessed with respect to the alternatives that are available.

 

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