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.