Scribd
Upload
220 views2 pages

Profit at Risk

Profit at risk (PaR) is a risk management measure used for electricity portfolios containing generation assets, trading contracts, and consumption to measure downside risk to profitability. PaR considers price and volume risk using Monte Carlo simulations of historical weather data. PaR was pioneered at Norsk Hydro to prepare for deregulated electricity markets and measures the probability that profit will fall below expectations.

Uploaded by

timothy454
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
220 views2 pages

Profit at Risk

Profit at risk (PaR) is a risk management measure used for electricity portfolios containing generation assets, trading contracts, and consumption to measure downside risk to profitability. PaR considers price and volume risk using Monte Carlo simulations of historical weather data. PaR was pioneered at Norsk Hydro to prepare for deregulated electricity markets and measures the probability that profit will fall below expectations.

Uploaded by

timothy454
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 2

Profit at risk

Profit-at-Risk (PaR) is a risk management quantity most often used for electricity portfolios that contain
some mixture of generation assets, trading contracts and end-user consumption. It is used to provide a
measure of the downside risk to profitability of a portfolio of physical and financial assets, analysed by time
periods in which the energy is delivered. For example, the expected profitability and associated downside
risk (PaR) might be calculated and monitored for each of the forward looking 24 months. The measure
considers both price risk and volume risk (e.g. due to uncertainty in electricity generation volumes or
consumer demand).[1] Mathematically, the PaR is the quantile of the profit distribution of a portfolio. Since
weather related volume risk drivers can be represented in the form of historical weather records over many
years, a Monte-Carlo simulation approach is often used.

Example
If the confidence interval for evaluating the PaR is 95%, there is a 5% probability that due to changing
commodity volumes and prices, the profit outcome for a specific period (e.g. December next year) will fall
short of the expected profit result by more than the PaR value.

Note that the concept of a set 'holding period' does not apply since the period is always up until the
realisation of the profit outcome through the delivery of energy. That is the holding period is different for
each of the specific delivery time periods being analysed e.g. it might be six months for December and
therefore seven months for January.

History
The PaR measure was originally pioneered at Norsk Hydro in Norway as part of an initiative to prepare for
deregulation of the electricity market. Petter Longva and Greg Keers co-authored a paper "Risk
Management in the Electricity Industry" (IAEE 17th Annual International Conference, 1994) which
introduced the PaR method. This led to it being adopted as the basis for electricity market risk management
at Norsk Hydro and later by most of the other electricity generating utilities in the Nordic region. The
approach was based on monte-carlo simulations of paired reservoir inflow and spot price outcomes to
produce a distribution of expected profit in future reporting periods. This tied directly with the focus of
management reporting on profitability of operations, unlike the Value-at-Risk approach that had been
pioneered by JP Morgan for banks focused on their balance sheet risks.

Critics
As is the case with Value at Risk, for risk measures like the PaR, Earnings-at-Risk (EaR), the Liquidity-at-
Risk (LaR) or the Margin-at-Risk (MaR), the exact (algorithmic) implementation rule vary from firm to
firm.[2]

See also
Value at risk
Margin at risk
Liquidity at risk

References
1. "What is Profit-at-Risk (PaR)?" (http://www.arbitrage-trading.com/ARTicles_WhatIsPaR.htm).
.arbitrage-trading.com. ART Ltd. Retrieved 8 January 2016.
2. Burger, Markus. "Risk measures for large portfolios and their applications in energy trading"
(http://www.risklab.es/es/jornadas/2011/RiskLab2011_Burger.pdf) (PDF). risklab.es. EnBW
Energie Baden-Württemberg AG. Retrieved 8 January 2016.

Retrieved from "https://en.wikipedia.org/w/index.php?title=Profit_at_risk&oldid=1114455686"

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy