Risk and Pricing Implications for the C-Suite

Top management can take steps to develop a more integrated perspective of a commodity trading portfolio and its potential impact on the entire organization.

The table below sets out important objectives and actions for an organization’s chief executive officer, chief financial officer and chief risk officer:

Objective Required Action
  • Sell high-margin products to monetize embedded asset optionality
  • Set up adequate, accurate and comprehensive risk quantification methodology that takes into account commodity and asset properties
  • Apply consistent and compatible methodologies for deal valuation and risk quantification
  • Ensure competitive yet adequate pricing by accounting for effect of transaction on overall portfolio
  • Share trade and risk analytics to leverage advanced financial and econometric methodologies
  • Steer existing operations and strategies based on risk/return principles in line with the organization’s risk appetite
  • Capture and synthesize key portfolio risks, e.g. market, credit and liquidity risks
  • Identify and quantify upside and downside of strategic alternatives – allocate capital accordingly
  • Foster understanding of fundamental drivers and their impact on trade performance
  • Provide basis for performance measurement
  • Monitor regulatory landscape and reflect on implications for commercial strategy
Objective Required Action
  • Financial stability
  • Ensure adequacy and accuracy of risk capital requirements
  • Identify financial vulnerabilities of trading operations and implement mitigation measures
  • Monitor key financial covenants in light of current and future operations
  • Finance strategic growth initiatives
  • Meet transparency requirements of existing financing structures and potential structured trade finance innovations
  • Account for all major risks and diversification effects in portfolio, e.g. maximizing scope of risks captured and capital efficiency
  • Model key financial covenants in light of current operations and strategic undertakings
  • Install comprehensive working capital management linked to market and credit risk management
Objective Required Action
  • Quantify future risks with required accuracy and comprehensiveness
  • Establish adequate risk quantification methodologies accounting for commodity properties, physical asset characteristics and market conditions
  • Institutionalize interaction between centralized risk management functions
  • Ensure that the operational risk team has enough time to think about specific risks in the portfolio outside of the standard daily process and to define specific stress scenarios
  • Facilitate ongoing model validation
  • Maintain flexibility to keep up with commercial strategy
  • Assume modular view in set-up of risk and pricing infrastructure
  • Define flexible system interfaces as a prerequisite for design and implementation
  • Increase operational efficiency
  • Harmonize risk and pricing methodologies within the organization
  • Adopt stable reporting processes, automated to the extent possible

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