Assignment Task Background Information Please provide a high-level assessment of the potential market risk and recommend a suite of fit-for-purpose market risk management principles and framework for the intended mandate. Expectation The business is eager to explore the trading activities and expect nothing but full support from Risk Management. The existing risk management processes are currently being revamped and thus expected to instill and embrace new recommendations. The management has keen awareness and firm belief in sound risk management however not all are familiar with market risk involving derivative trading. The draft recommendation would be reviewed by above stakeholders. A Gas-fired Power Generation Company would like to undertake trading in electricity derivatives market, in order to protect and enhance future cash flows and manage the impact of price volatility in electricity market. The intended trading activities may include hedging for production, and also opportunistic arbitrage. The trading derivative instruments may involve Over The Counter or On The Exchange, financially settled swaps, futures, options etc. Currently the electricity sales contracts of the company are mostly long term Power Purchase Agreements with a mix of pricing terms that are fixed, floating or with call/put options. There are some occasional spot retail contracts too. The company’s last annual report has shown a significant decrease in last year’s profits, the total yearly MtM loss amount is 10 mil USD. REQUIREMENT 1 Any format of files, excel, word, powerpoint, or handwritten 2 Any length, not necessary to be very detailed 3 Please bring to the meeting either electronic form or print-out and be prepared to explain the answer in no longer than 20 minutes. 4 Quantitative examples not required but feel to use any hypothetical example if need 5 Please do not make connection or reference to any real company names. The management would like to initiate the trading mandate as soon as possible and has a target profit of 10 mil USD for the upcoming year. The proposal is being reviewed across functional departments including Market Risk Team.