Does your system for measuring financial risk offer clear and explainable outcomes for your commodity risk management program?
- Measurement must be holistic. Effective risk program measurement must link the results of commercial pricing and financial hedge transactions and present them on a combined net basis, something supported by a good system.
- Measurement of exposures must be done in pricing terms. Your accounting system probably won’t help with this as accounting exposures are defined in their own distinct ways. Typically the commercial system is where you mine for data and care must be taken to ensure common data sets are used for analysis.
- Measurement needs to reflect the multiple dimensions of risk. Exposure is more than about “how much do I have?” It also needs to be understood in volumetric and financial terms, in terms of timing and ultimately in terms of potential outcomes.
- Measurement systems, designed right, should expose inefficiency. No risk management program is perfect but if volatility and losses are creeping through you’ll want to identify which transactions, commercial deals and plants are causing them.