Producing a Clean Hedge that is Defensible
Hedging can really be a gamble if not done right. The latest news from OW Bunker A/S highlights some of the concerns from hedging. The stock has fallen 60% largely as a result of uncertainty in the hedge taken by the company. In this case, it may very well been a clean hedge that was poorly timed (failure of analytics) or it was a “dirty” hedge which constituted a gamble in the market place. Either way the Chief Risk Officer has been fired.
I demonstrated last time in Effective Power Hedging that PMA can be used as an analytical tool to develop a systematic hedging program. I want to highlight the value of PMA as a career saving tool (AKA: cover your a** (CYA) tool) PMA can be customized to store and run every day. All the analytical background for decision making can be pulled up. I am sure management at OW Bunker A/S wish they had simulations at least demonstrating the risk/reward they saw when they made the hedge. With PMA, series of simulations can be pulled to justify the transaction. In addition, the Risk Officer would have liked the simulation to be developed from a third-party stand point. PMA does offer customization, but the backbone and secret sauce is the extensive work in calibrating the model to emulate the market prices and fuel consumption. You can throw the kitchen sink at PMA and it will return the appropriate value given the inputs into the model. PMA can be customized, but can be still considered external to your organization.
A failure of identifying the risk reward profile appropriately would come from your simulation lacking enough uncertainty. One can use PMA to backcast to “prove” the simulation supported an appropriate range of uncertainty. For those looking to manage and perform hedging in power I am strongly suggesting you reach out to me to show how PMA can potentially save your career. Not only do we have the tools to help you, but we have the experience and knowledge. In many cases, not hedging commodities that offer liquidity can be constituted as much gambling as a person who trades for profit. You can always be second guessed for your decisions. All Energy Consulting can give you support for your decisions or indecisions.
Note on your calendar, I will be speaking at an event in Dec 10-11 on Solving Commodity Risk Exposures for the power industry. * POSTPONED TO FEB 15 The event is focused on Energy and Commodity trading. I look forward to seeing many of you there.
Your CYA Energy Analyst,
David
David K. Bellman
All Energy Consulting LLC- “Independent analysis and opinions without a bias.”
614-356-0484
[email protected]
@AECDKB
blog: http://allenergyconsulting.com/blog/category/market-insights/
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