Risk Management

In this chapter, we first discuss the different types of risks associated with energy trading, as well as their characteristics and drivers. We then focus on price risk, credit risk and product liquidity risk management. After that, the concept of risk indicators is presented. We end this chapter by explaining risk management processes. As a prerequisite, it needs to be stated that in practice all economic activities imply risks. This is neither “good” nor “bad” but just the nature of business. The future is always uncertain. Hence, it should not be the objective of a company (or its risk management) to avoid all risks—as this would imply not to spend any money and result in the company’s failure. Instead, a company needs to find the right balance between consciously taking risks (which implies chances) and keeping the company financially stable. Risks thus need to be taken purposefully, understood properly and managed professionally. Risk management supports this process. How to do this in the context of commodity trading is what is explained in this chapter.