The table below sets out the key challenges to maximizing value and offers strategies for overcoming them:
| GOAL |
WHAT’S WRONG TODAY |
HOW TO FIX IT |
|---|
| Extract optimal value from deal and portfolio |
- Focus is purely on risk compliance
|
- Focus on risk-adjusted value capture and capital efficiency paired with best-practice governance
- Employ a single methodological framework for deal valuation and risk quantification
|
| Maintain optimal amount of capital, processes and mitigation measures to withstand market stresses |
- Only parametric and historical VaR used, rarely with adjustments for market illiquidity
- Asset optionality is ignored
|
- Use Monte Carlo simulation engine to incorporate empirical properties of commodities
- Apply Earnings at Risk framework to reflect available market liquidity in close-out scenario
- Incorporate physical characteristics of assets
|
Optimize capital, processes and mitigation measures to cope with counterparty
credit risk |
- Focus solely on current exposure and Credit VaR (if established) metrics computed on standalone basis
- Only ad hoc requests for third party credit information with limited predictive power – often too late to mitigate against counterparty default
|
- Develop life cycle perspective on counterparty credit risk and link to market scenarios allowing for an integrated counterparty valuation approach
- Actively manage and trade credit risk at portfolio and deal level
|
| Allocate risk capital with optimal efficiency |
- Risk is evaluated in silos with a limited amount of diversification considered between subportfolios
- Lack of integrated view on market and credit risks
- Overall risk contributions of each branch of trading activity are not captured
|
- Quantify overall risk impact of a single deal and derive implications for valuation at the aggregated book, subportfolio and overall portfolio levels
- Consider cross-commodity and inter-temporal diversification as well as individual book or framework risk contributions
- Evaluate commonalities of risk drivers between market and credit risks
|
| Establish liquidity and contract management sufficient to support growth strategies |
- Contract management solely focused on legal stipulations
- Limited insight into mid to long-term liquidity needs
|
- Adopt contract management with rigid governance around securities employed
- Integrate working capital management as well as cash and net debt management with market and credit scenarios
- Link different types of risk to increase the accuracy of liquidity planning
- Support structured trade finance initiatives in illiquid assets
|
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