Energy Trading Assignment 1
1).What is Risk?
Risk = Uncertainty * Exposure
2).Name the 3 offices within a trading organization and list their functions. Front Offices: Its functions are trading, structuring, marketing, information and analysis, scheduling and risk management; Middle Offices: Its functions are risk control, control market risks by measuring portfolio price risk and stress testing portfolio, also control credit risks by measuring credit exposure. Back Offices: Its functions are including settlement and invoicing—checkout with counterparties, broker reconciliation and volume and price actualization; contract administration—trades without contracts, netting agreements; confirmation and monthly accounting. .
3).What is Value at Risk (VaR)?
Value at risk is the expected loss for an adverse market movement in a specified probability (e.g. 95%) over a particular period of time (e.g. a day).
4).List and define the three main types of risk a trading organization faces. The three main types of risk a trading organization faces are: Market risk, credit risk and operational risk. Market risk: It’s a combination of price risk, liquidity risk and volume risk. Credit risk: The risk of loss of principal or loss of a financial reward stemming from a borrower's failure to repay a loan or otherwise meet a contractual obligation. Operational risk: the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.
5).How can each type of risk be managed?
Operational risk can be managed through organizational structure and process control, the technology development and information gained. Credit risk can be managed by regulation announced by NAESB and ISDA, and also by adopting the Banking Model for credit risk management. Market risk can be managed by the energy price risk management tools like futures, forwards, swaps and so on; besides, the regulations made by NYMEX and ICE can also help to...
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