volume risk
volume risk is one of the core components of business risk (revenue risk), the another being price risk (or margin risk) .
patients at high risk of death after lung - volume - reduction surgery. - pubmed - ncbi
volume risk is the risk that product origination (sales) volumes will materially deviate from the planned / budgeted / expected amounts due to external or internal factors. the volume metric may be referencing the number of transactions, the total size of transactions etc .
when limiting the private partner’s exposure to volume risk, the contract should provide access for the authority to the upside if demand is greater than expected .
in social infrastructure projects, higher use of the facility is generally not a natural policy objective and volume / use risk should be removed from the contract .
lung - volume - reduction surgery is a proposed treatment for emphysema, but optimal selection criteria have not been defined. the national emphysema treatment trial is a randomized, multicenter clinical trial comparing lung - volume - reduction surgery with medical treatment .
home > appendix structuring and drafting the tender and contract - describing main risks > 1. 2 describing main risks during the operations phase and potential allocation > 1. 2. 1 revenue risk – demand or volume risk [ 3 ]
forward fixing your prices and accepting volume flexibility on that fixing, protects you against budgetary catastrophe in times of high consumption. in many cases, spot contracts are less expensive than forward fixings with volume flexibility. this clearly illustrates that with a forward fixing contract with volume flexibility, risk is shifted from the client to the supplier and not the other way around. and that makes the claim that spot contracts are less risky absurd .
most of a company’s costs are fixed costs that occur regardless of sales volume. as long as a business earns a substantial profit on each sale and sustains adequate sales volume, fixed costs are covered and profits are earned. other company costs are variable costs incurred when sales occur. the business earns less profit on each sale but needs a lower sales volume for covering fixed costs .
javier orlando pantoja robayo & andrea roncoroni, 2012 .
optimal static hedging of energy price and volume risk: closed - form results ,
documentos de trabajo cief 010668, universidad eafit .
same thing when a period of larger than expected consumption coincides with high energy spot prices. in those cases, you will experience that the old contract with its volume conditions wasn’t such a bad idea after all. in such contracts, the volume issue only starts to bite once you’ve hit the threshold volumes. for this reason we recommend any clients that want to have a high degree of certainty over what their future energy prices will be to sign traditional forward fixing contracts, even if they come with volume conditions (nowadays some suppliers offer consumers of smaller volumes forward fixing contracts without volume conditions). if you want to sign a spot contract, only do it when you are willing to keep the price of at least 20% of your volume unfixed and open for the spot market. and if you have a high volume uncertainty, you should keep the price open for the spot market for even higher parts of the volume .
measures of risk - adjusted performance revise accounting earnings to take into consideration the level of risk a company assumed to generate them .
“no volume risk” is often cited as one of the advantages of a spot energy contract. and indeed, these contracts don’t have “volume conditions” in the sense of minimum or maximum volumes that have to be / can be consumed. many buyers of energy have gone through agonizing experiences when they ran into the threshold levels of such traditional volume conditions. this was particularly a problem in 2009. many industrial consumers of energy saw their consumption drop below levels that they hadn’t anticipated even in their worst nightmares .
high concentrations of risk aren’t necessarily bad. everything depends on the company’s appetite for it. unfortunately, many companies have never articulated a risk strategy .
we define risk broadly to include any event that might push a company’s financial performance below expectations. typically, the measure used is capital at risk, earnings at risk, or cash flow at risk, depending upon whether the focus is on the balance sheet, the income statement, or cash flows .
a company must not only understand the types of risk it bears but also know the amount of money at stake. less obviously, it should understand how the risks different business units take might be linked and the effect on its overall level of risk. in other words, companies need an integrated view. american express, for example, might discover that a sharp slump in the airline industry had exposed it to risk in three ways: business - volume risk in its travel - related services business, credit risk in its card business (the risk of reimbursing unused but paid - for tickets), and market risk from investments made in airline bonds or aircraft leases by its own insurance unit .
board processes. boards need to review the effectiveness of their own risk - management processes periodically. they should look at committee structures and charters, how well board members understand risk policies, and the value of their interactions with management on risk. some companies use a formal self - assessment tool that allows directors to rate the effectiveness of board - level risk - management processes in areas such as risk transparency and reporting, committee meetings, and risk expertise. reviews should take place about once a year .
the first risk is what we refer to as volume risk. there are a lot of good and bad things that can happen on any one lease. the possible good things include anything that increases output, such as: new horizontal or vertical wells may be drilled, new technology can be implemented, shallower zones can be opened up, etc .
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formal modelling of business risk (and its components) is in a rather nascent stage. it is not one of the recognized regulatory risk types that attract capital requirements .
to create a risk culture, companies need a formal, company - wide process to review risk, with each business unit developing its own risk profile that is then aggregated by the corporate center. the reviews are a way of ensuring that managers at every level understand the key risk issues and how they should be dealt with. drawing up a monthly heat map is one way of establishing a formal risk - review process .
[ 5 ] in some light rail schemes based on volume payments, the risk is also shared by a system of bands as in some shadow toll roads. for example, this is the case for a number of light rail transport (lrt) ppps in spain .
after evaluation and pulmonary rehabilitation, we randomly assigned patients to undergo lung - volume - reduction surgery or receive medical treatment. outcomes were monitored by an independent data and safety monitoring board .
readers of my previous blog article (in dutch) will have remarked that i was quite agitated by misleading sales of spot contracts to end consumers. i would want to come back on a specific issue, the volume risk, and write a separate blog article in english on .
companies must also provide education and training in risk management, which for many managers is quite unfamiliar, and establish effective incentives to encourage the right risk - return decisions at the front line. judging the performance of business - unit heads on net income alone, for instance, could encourage excessive risk taking; risk - adjusted performance should be assessed, too. ultimately, people must be held accountable for their behavior. good risk behavior should be acknowledged and rewarded and clear penalties handed out to anyone who violates risk policy and processes .
segregation of duties. companies must separate employees who set risk policy and monitor compliance with it from those who originate and manage risk. salespeople, for instance, are transaction driven—not the best choice for defining a company’s appetite for risk and determining which customers should receive credit .
risk ownership. the existence of a corporate risk organization doesn’t absolve business units of the need to assume full ownership of, and accountability for, the risks they assume. business units understand their risks best and are a company’s first line of defense against undue risk taking .
disaster risk reduction (drr) and climate change adaption (cca) in international cooperation .
one way of gaining a transparent, integrated view is to use a heat map: a simple diagram showing the risks (broken down by risk category and amount) each business unit bears and an overall view of the corporate earnings at risk. the heat map tags exposures in different colors to highlight the greatest risk concentrations; red might indicate that a business unit’s risk accounted for more than 10 percent of a company’s overall capital, green for more than 5 percent. (exhibit 2 shows a risk heat map that flags high credit risk in two units .) to make risks transparent—and to draw up an accurate heat map—companies need an effective system for reporting risk, and this requires a high - performing risk - management organization .
finally, business - volume risk, stemming from changes in demand or supply or from competition, is exposure to revenue volatility. the leading us carrier united airlines, for instance, filed for protection under chapter 11 of the us bankruptcy code this year after falling demand hit its revenues .
caution is warranted in the use of lung - volume - reduction surgery in patients with emphysema who have a low fev1 and either homogeneous emphysema or a very low carbon monoxide diffusing capacity. these patients are at high risk for death after surgery and also are unlikely to benefit from the surgery .
each industry faces its own variations on the four types of risks; each company should thus develop a taxonomy that builds on these broad risk categories. in pharmaceuticals, for instance, a company could face business - volume risk if a rival introduced a superior drug and higher operational risk if an unexpected product recall cut into revenues. in addition, the company would have to consider how to categorize and assess its r & d; risk—if a new drug failed to win approval by the us food and drug administration, say, or to meet safety requirements during clinical trials .
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top - notch talent. risk executives at both the corporate and the business - unit level must have the intellectual power to advise managers in a credible way and to insist that they integrate risk - return considerations into their business decisions. risk management should be seen as an upward career move. a key ingredient of many successful risk - management organizations is the appointment of a strong chief risk officer who reports directly to the ceo or the cfo and has enough stature to be seen as a peer by business - unit heads .
the directors’ unfamiliarity with risk management is often mirrored by senior managers, who traditionally focus on relatively simple performance metrics, such as net income, earnings per share, or wall street’s growth expectations. risk - adjusted performance
in public transport projects, assuming a vertical integrated approach (i. e. service to the user is included in the scope of the infrastructure dbfom), it is clear that higher utilization is a success in terms of public strategy. however, providing the public with a safe mobility option is essential. most of the best ppp structures for large integrated transport infrastructure ppps are based on a mixed revenue regime. part of the payments are linked to volume / actual use, but with volume risk being tempered with a portion of payments based on quality or availability [ 5 ] .
to manage risk properly, companies must first understand what risks they are taking. to do so, they need to make all of their major risks transparent and to define the types and amounts of risk they are willing to take—goals often facilitated by the creation of a high - performing risk - management organization that accurately identifies and measures risk and provides an independent assessment of it to the ceo and the board. although these steps will go a long way toward improving corporate risk management, companies must also go beyond formal controls to develop a culture in which all managers automatically look at both risks and returns. rewards should be based on an individual’s risk - adjusted—not simply financial—performance .
) and the integration of risk management into day - to - day decision making. companies that fail to improve their risk - management processes face a different kind of risk: unexpected and sometimes severe financial losses (exhibit 1) that make their cash flows and stock prices volatile and harm their reputation with customers, employees, and investors .
clear individual responsibilities. risk - management functions call for clear job descriptions, such as setting, identifying, and controlling policy. linkages and divisions of responsibility also need to be defined, particularly between the corporate risk - management function and the business units. should the corporate center have the right to review their risk - return decisions, for example? should corporate risk - management policies define specific mandatory standards, such as reporting formats, for the business units ?
this report updates the chartis report solvency ii technology solutions 2014, focussing on risk management systems for the insurance industry .
seldom figures in these managers’ targets. improving risk management thus entails both the provision of effective oversight by the board (
the amount of debt and equity that makes up a company' s capital structure has many risk and return implications .
the task of the risk organization is to identify, measure, and assess risk consistently in every business unit and then to provide an integrated, corporate - wide view of these risks, ensuring that their sum is a risk profile consistent with the company’s risk strategy. the structure of the organization will vary according to the type of company it serves. in a complex and diverse conglomerate, such as ge, each business might need its own risk - management function with specialized knowledge. more integrated companies might keep more of the function under the corporate wing. whatever the structure, certain principles are nonnegotiable .
chartis is the leading provider of research and analysis on the global market for risk technology and is part of incisive media .
the common cause of lower demand is an economic down - turn which as a general business risk should be borne by the private partner. however, lower demand may also depend on competing facilities, network risks, or other subtle risk events .
but more needs to be done. by focusing on risk - adjusted performance, not just on traditional accounting measures, business managers will develop a better understanding of the risk implications of their decisions. for businesses that require large amounts of risk capital, suitable metrics include shareholder value analysis and risk - adjusted returns on capital. a risk - adjusted lens helped one credit card company understand, contrary to expectations, that returns from new customers and customers about whom it had little information were more volatile than returns from existing customers, even if these groups had the same expected customer value. historically, that had been the key metric for approving new customers. now the approval process also takes into account the higher risk that is associated with new customers .
[ 6 ] for a definition and deeper explanation of “network risks”, see partnerships victoria (risk allocation and contractual issues, 2001). other examples of network risk, according to partnerships victoria are when a government agency controlling bulk water distribution may be unable or unwilling to supply raw water to the ppp water treatment facility in the necessary quantity or quality. a more abstract example of network risk is the risk that government will enter into other arrangements for accommodation services competing with those supplied under the contract .
board risk reporting. reports to the board and its committees must go beyond raw data by setting out, for example, what the key risk - return trade - offs might be. data alone probably won’t reveal the real issues or promote proper debate .
in the swiss alps, risk management professionals regard the implementation of new climate change adaptation strategies, such as the swiss integrated risk management approach national platform for natural hazards (planat) as the right step forward. planat is a comprehensive and holistic approach, which considers a broad range of preparedness, response, and recovery strategies on a societal level for natural hazard risk reduction (planat
reichel, c. & frömming, u. u. int j disaster risk sci (2014) 5: 41. urltoken
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risk comes in four main varieties. the first, market risk, takes the form of exposure to adverse market price movements, such as the value of securities, exchange rates, interest rates or spreads, and commodity prices. ford, for instance, was hit by market risk in 2002, when palladium prices tumbled and it had to take a $ 952 million write - down on its stockpile .
on a theoretical level, local environmental knowledge is increasingly being recognized as an important component in risk management. however, through our research it became apparent that professional actors of risk management do not yet fully implement the potential of local frames of reference and strategies of action into their risk management plans, even though this kind of knowledge contains various prevention, coping, and adaptation strategies that deal with expected future uncertainties (frömming
demand risk may occur in a contradictory form: the higher the demand, the higher the risk. this happens in projects where the revenue is based on availability. in such contexts, a volume of use higher than anticipated by the government, in terms of the design of the facility, may seriously impact the service quality or even the availability. a compensation mechanism should be established in these cases so as to restore the economic equation of the project contract. this can be done by including in the payment mechanism a portion linked to the use of the service or other measures .
as for defining the level of risk companies will accept, one common approach for them is to decide on a target credit rating and then assess the amount of risk they can bear given their capital structure. credit ratings serve as a rough barometer, reflecting the probability that companies can bear the risks they face and still meet their financial obligations. the greater the level of risk and the lower the amount of capital and future earnings available to absorb it, the lower the credit ratings of companies and the more they will need to pay their lenders. companies that have lower credit ratings than they desire will likely need to reduce their risk exposure or to raise costly additional capital as a cushion against that risk .
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demand risk transfer should be always be considered with caution. significant transfer of the risk, with no mitigation or sharing mechanisms, should only be considered when boosting demand is essential to the success of the project from the government’s perspective (see section 4. 9). another general rule for deciding the allocation of use / demand is the scope of the project. if the essence of the ppp is to operate institute tariffs or collect tolls, some exposure to risk should naturally be included in the contract. however, if the contract does not provide the necessary tools for managing the demand risk (basically, the ability to influence the management of the service provision to the user), the risk should not be transferred .
the head of market risk unit leads a team in charge of contributing to the optimization of the liquidity, funding and lending functions of the bank .
, the proposal of a contract without any such volume obligations sounds very tempting. and indeed, a spot contract is a ‘you only pay what you consume’ type of contract. some such contracts really look at what you consume on an hourly basis and multiply that with the spot price for that hour. most spot contracts look at the monthly consumption and multiply that with the average spot price for that month. so, even if your consumption drops to zero, no problem, no energy will be billed. if your consumption doubles, you’ll pay the spot price for that extra energy. no more thresholds to keep an eye on, just simply pay for what you consume. i can understand why some people call that ‘no volume risk’. but i don’t agree with them. not at all .
finally, to convey the message that the potential downside of every decision must be considered as carefully as the potential rewards, ceos should be heard talking about risk as often as they talk about markets or customers. the ceo’s open recognition of the importance of good risk management will influence the entire company .
even world - class risk management won’t eliminate unforeseen risks, but companies that successfully put the four best - practice elements in place are likely to encounter fewer and smaller unwelcome surprises. moreover, these companies will be better equipped to run the risks needed to enhance the returns and growth of their businesses. without adequate risk - management programs, companies may inadvertently take on levels of risk that leave them vulnerable to the next risk - management disaster, or, alternatively, they may pursue
recklessly conservative
strategies, forgoing attractive opportunities that their competitors can take. either approach will surely be penalized by investors .
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these elements will go a long way toward improving risk management but are unlikely to prevent all undue risk taking. companies might thus impose formal controls—for instance, trading limits. indeed, the recently adopted sarbanes - oxley act, in the united states, makes certifying the adequacy of the formal controls a legal requirement. yet since today’s businesses are so dynamic, it is impossible to create processes that cover every decision involving risk. to cope with it, companies need to nurture a risk culture. the goal is not just to spot immediately the managers who take big risks but also to ensure that managers instinctively look at both risks and returns when making decisions .
the ceo, with the help of the board, should define the company’s risk strategy. but more often than not, it is determined inadvertently, every day, by dozens of business and financial decisions. one executive, for example, might be more willing to take risks than another or have a different view of a project’s level of risk. the result may be a risk profile that makes the company uncomfortable or can’t be managed effectively. a shared understanding of the strategy is therefore vital .
in such an environment, companies not only protect themselves against unforeseen risks but also enjoy the competitive advantage that comes from taking on more risk more safely. the ceo of one fortune 500 corporation, asked to explain his company’s declining performance, fingered the
lack of a culture of risk taking
; its absence, he explained, meant that the company was unable to create innovative, successful products. by contrast, a senior partner of a leading investment bank with excellent risk - management capabilities noted ,
our trading operation has created a series of controls that enable us to take more risk with more entrepreneurialism and, in the end, make more profits .
1. 2 describing main risks during the operations phase and potential allocation up 1. 2. 2 revenue risk – tariff levels (only in user - pays ppps )
education and expertise. training programs might be needed for current and new board members. boards should also look at whether they need new members with risk - management expertise .
companies might also be tempted to adopt a more risk - averse model of business in an attempt to protect themselves and their share prices. william h. donaldson, the chairman of the us securities and exchange commission (sec), acknowledged this trend when he told an interviewer that he was concerned about a
loss of risk - taking zeal .
the way we mitigate against this type risk is by buying thousands of interests in thousands of properties. we make estimates about the projected future output of a property in the process of making an offer or buying a deal, but those are guesses based on historical production; and they’re always wrong. oil and gas do not grow under the ground; these fluids are trapped there. as you remove volume, there is less fluid in the reservoir and thus less pressure to push the fluids to the
low pressure sink
that is created around the well bore. thus, in the absence of any other risk factors, the production volume normally goes down over time. this is what we mean by the term decline. so to make a guess as to what future volumes are going to be, we plot the recent historic production against time and simply project the
decline curve
forward into future periods to see what those volumes might be if the current decline holds. usually, the assumption is that whatever the decline is now will be the decline for the life of the property under our
guesstimates .
the temperature increase also means that small glaciers are expected to disappear, while larger glaciers will suffer a volume decrease of up to 70% by 2050. although the period between 1985 and 2000 experienced particularly hot summers, the swiss glaciers have lost 20% of their mass within only the last 15 years. in addition to a decrease of water resources, the decline of ice is leading to a loss of stability of adjacent slopes (rebetez
the heat map gives a top - level indication of whether a company is sticking to its strategy and provides for corrective action. but both depend upon the next two elements of this risk - management program .
in transport projects, if the transport service to the user is not included in the scope of the contract, but the contract relates only to the infrastructure, transferring demand risk does not provide value for money .
sometimes these guesses are off only a little bit and sometimes by a lot, but they are always off. but what happens is that the ones that do better than we guessed and the ones that do worse tend to offset each other. so our guess on any one property is always wrong, but as a group, we are usually pretty close. so our
volume
risk goes way down by owning a lot of properties relative to someone who owns one or a few. out of a thousand leases, if one goes down, hopefully another increases and unless one or two leases make up the majority of the income, they tend to balance out .
professional stakeholders in risk and hazard management are becoming increasingly aware of the progressive potential of the resilience concept, instead of simply trying to keep social - ecological systems as stable as possible and in balance. with the exploration of local knowledge and its integration into risk and hazard management, one can develop an approach that directs attention to the acquisition of local skills and knowledge that help the local population adapt to and cope with future environmental changes .
the second type of risk is simple price risk. the price of oil goes up and down and whoever holds a property is subject to the variances of the markets that set prices. one thing that happens though to me as a buyer is that if i use the same source of price guesses for future periods every day, then the valuations i used over, say the last five years, should be the same as the average price over the previous five years. which is probably not a bad price to use today. going forward with the portfolio we have, same thing though. who knows? none of us can get away from price risk .
a company’s board of directors should understand and oversee the major risks it takes and ensure that its executives have a robust risk - management capability in place. to assure appropriate oversight, the board must address a few key issues .
in other words, every second company was struck at least once, and some more frequently, by a severe risk event. such events are thus a reality that management must deal with rather than an unlikely
tail event .
an example of a subtle network risk is the risk related to traffic light priority in light rail transport (lrt) projects. usually, a government will grant priority at intersections and traffic lights for the lrt vehicles to maintain the commercial speed levels as prescribed. so when the mobility authority does not provide traffic light priority to the light rail and this affects the commercial speed, the private partner should be given relief from punctuality obligations and an excuse for certain payment deductions .
taking and managing risk is part of what companies must do to create profits and shareholder value. but the corporate meltdowns of recent years suggest that many companies neither manage risk well nor fully understand the risks they are taking. moreover, our research indicates that the problem goes well beyond a few high - profile scandals. mckinsey analyzed the performance of about 200 leading financial - services companies from 1997 to 2002 and found some 150 cases of significant financial distress at 90 of them .
in a few industries, companies have already begun to invest in developing sound risk - management processes. for example, many financial institutions—prodded by regulators and shaken by periodic crises such as the us real - estate debacle of 1990, the emerging - markets crisis of 1997, and the bursting of the technology and telecommunications bubble in 2001—have worked to upgrade their risk - management capabilities over the past decade. in other sectors, such as energy, basic materials, and manufacturing, most companies still have much to learn .
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if your consumption is higher than 5. 000 mwh, you will pay the spot price for those extra volumes. if at the end of the year the aggregated volume of the months is 60. 000 mwh, the volumes you haven’t consumed and for which you got back the spot price (in certain months) will equal the extra volumes bought at spot price (in certain months). if you’re lucky, you might have consumed less in exactly those months when the spot prices were high and more in the months with low prices. you could actually make some extra money that way. but it could also be the other way around. the opportunity and risk are even higher when you have a contract that settles on an hourly basis. it should be remarked that in that case, an extra problem occurs of checking such bills based on hourly consumptions, fixed levels and rates .
owning oil and gas interests has two main types of risk that an owner needs to be aware of. factors outside of your control may result in large and unexpected gains, or may lead to sudden loss of income. in this blog post, i’ll explain how i view these factors .
sébastien chaumont & peter imkeller & matthias müller & ulrich horst, 2005 .
a simple model for trading climate risk ,
vierteljahrshefte zur wirtschaftsforschung / quarterly journal of economic research, diw berlin, german institute for economic research, vol. 74 (2), pages 175 - 195 .
first of all, it should be remarked that the zero energy volume risk proposition only holds as long as you keep everything open for the spot market. many such spot contracts also have clauses that allow you to forward fix your prices. such fixings are then always made for capacity blocks. let’s say you are a client with such a spot contract and you expect you will consume 60. 000 mwh next year and you want to fix your price 100% . your supplier will come back to you with something like ‘ok, your load duration is 6. 000 hours on an annual basis, so i’m going to fix a 10 mw calendar year block for you’. if your contract is then regulated based on monthly consumption times the average spot price for that month, every month that you consume less than 5. 000 mwh, you will pay the fix price and get back the spot price for the unconsumed volumes .
directors confirm this view. a 2002 survey by mckinsey and the newsletter directorship showed that 36 percent of participating directors felt they didn’t fully understand the major risks their businesses faced. an additional 24 percent said their board processes for overseeing risk management were ineffective, and 19 percent said their boards had no processes .
operational risk is exposure to losses due to inadequate internal processes and systems and to external events. for example, allfirst, a baltimore - based subsidiary of allied irish banks, lost $ 691 million at the hands of a single rogue trader whose practices went undetected for five years until he was caught in 2002 .
the level of returns required will vary according to the risk appetite of the ceo and the board. some might be happy taking higher risks in pursuit of greater rewards; others might be conservative, setting an absolute ceiling on exposure regardless of returns. at a minimum, the returns should exceed the cost of the capital needed to finance the various risks .
credit risk is exposure to the possibility that a borrower or counterparty might fail to honor its contractual obligations. in 2002, for instance, the bank of new york announced that it would increase its loan - loss provision by $ 185 million, to a total of $ 225 million, for the third quarter of 2002, largely because of loans it had made to telecom companies .
operating leverage is the degree to which a firm or project can increase operating income by increasing revenue. a business that generates sales with a high gross margin and low variable costs has high operating leverage. the higher the degree of operating leverage, the greater the potential danger from forecasting risk, where a relatively small error in forecasting sales can be magnified into large errors in cash flow projections .
[ 4 ] however, there may be situations where user payments are considered as a source of funds for the project, but where maximizing the use is not the highest priority of the authority (for example, some dynamic tolling aimed to manage traffic congestion). therefore, the authority may decide to remove the demand risk and assume it by structuring the revenue regime under an availability payment scheme .
if a competing facility promoted by the authority (or by the government in general), which was not announced or planned at the time of the tender, causes a down - turn in traffic compared to previous projections, this is commonly (or should be) considered a retained risk event. competing facilities are the clearest case of network risks [ 6 ] that should be taken back by the authority .
as with any strategy, a company’s risk strategy should be
stress - tested
against different scenarios. a life insurance company, for example, should examine how its returns would vary under different economic conditions and ensure that it felt comfortable with the potential market and credit losses (or with its ability to restructure the portfolio quickly) in difficult economic times. if it isn’t comfortable, the strategy needs refining .
board structures. the board must decide whether risk oversight should be vested in an existing committee (such as the audit or finance committee), in a new committee, or divided among a number of committees. the audit committee might seem the natural choice, but as it already faces expanded responsibility to ensure the accuracy of financial reporting, it might not be able to cope with a further expansion of its charter .
professional actors in hazard management frequently raised the argument that local environmental knowledge is too “subjective” for complementing existing “objective” scientific knowledge used by hazard and risk management plans. but from our point of view, instead of dichotomizing local knowledge and scientific knowledge, we should look for their affinities. “objective” scientific knowledge and its underlying values are much less neutral than often claimed, ignoring certain values and issues and favoring others. as foucault (
it is the taking of risks that ultimately creates shareholder value. the right response, therefore, is to strike a balance that protects the company from the costs of financial distress while allowing space for entrepreneurship. management should have the freedom to work in an environment where the potential rewards of any business decision are consciously weighed against the risks and where the company is happy with the level of risk - adjusted returns resulting from that decision .
based on a holistic approach, the anthropological data not only showed local perceptions of climate change, but also what different coping strategies in agriculture and forestry were used in order to face related natural hazards. these local frames of reference and coping strategies both have an impact on how vulnerable or resilient local communities are in times of climate change. this in turn is important for adaptive risk management dealing with new uncertainties in an ecological and societal change .
to manage risk properly, companies need to know exactly what risks they face and the potential impact on their fortunes. often they don’t. one north american life insurance company had to write off hundreds of millions of dollars as a result of its investments in credit products that were high - yielding but structured in a risky manner. these instruments yielded good returns during the economic boom of the 1990s, but the severity of subsequent losses took top management by surprise .
triggered by the climate change discourse, professionals in risk management, such as scientific advisors and political actors, increasingly realize that these new uncertainties related to environmental changes have to be included into their calculations, instead of maintaining current action plan routines. as dr. ruedi haller, the head of the research and geospatial information section at the only swiss national park, indicated with regard to the significant changes in weather patterns in recent years, which he related to climate change :
). the multimedia map format that we used allows end users of the map to choose between various map features to access multimedia information such as digital video, digital photos, and written text, which were georeferenced before being integrated into the map. the final map thereby helps users to compare, analyze, and present qualitative and quantitative spatial information. in addition, it creates a platform that visualizes local spatial knowledge and makes it directly comparable with official hazard maps in risk management .
formulating such a strategy is one of the most important activities a company can undertake, affecting all of its investment decisions. a good strategy makes clear the types of risks the company can assume to its own advantage or is willing to assume, the magnitude of the risks it can bear, and the returns it demands for bearing them. defining these elements provides clarity and direction for business - unit managers who are trying to align their strategies with the overall corporate strategy while making risk - return trade - offs .
the data from the safien valley show that a wide range of local environmental knowledge exists in the fieldwork area. much of this knowledge is directly relevant to the local population’s ability to protect against and cope with natural hazards, the occurrence and intensity of which are likely to increase in times of climate change. however, an important finding of our research is that these bodies of local environmental knowledge are rarely taken into account by professionals in disaster control, and they generally do not inform avalanche records. almost all key informants complained that their often highly differentiated knowledge about avalanches or mudflows was rarely considered in the creation of risk and hazard plans :
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the head of unit leads a team in charge of monitoring and analysing prudential regulatory developments .
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as much as we hope for these positive developments, negative events do occur very frequently. the production casing can collapse, wells can
water out
, the operator can take off with everyone' s money, and so forth .
the most common negative event is that wells get plugged out as non - commercial. remember, with the exception of taxes, you own a non - cost - bearing interest. let' s say for example way back you or your predecessor in interest signed an oil and gas lease with an exploration company. that lease granted the company and its partners (the working interest owners) the right to drill a well. the mineral owner (s) received a royalty interest under the lease or leases, thus creating the royalty owners. the company and / or the working interest owners paid 100% of the cost of drilling, completing, and producing the well or wells and you paid and pay nothing to keep the well producing. they get 100% of the revenue less the royalty interest, which means they are receiving something like 75% to 87. 5% of the income, but paying all of the bills .
when the working interest owners make less money from the production than the lease is costing them to produce it, and all or most of the possible opportunities have been tried or studied, they will plug the wells and walk away. this means you could be getting $ 1000 a month on a well that is very important to you but that is uneconomic or non commercial for the operator. these companies will not produce a money losing well for very long. so you go from a big check to nothing when non commercial well gets plugged and it can be a nasty surprise. leases all have an economic life; some are shorter and some are longer; but eventually the costs are going to exceed the revenues .
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for this analysis, we defined financial distress as a bankruptcy filing, a ratings - agency downgrade of two or more notches, a sharp decline in earnings (50 percent or more below analysts’ consensus estimates six months earlier), or a sharp decline in total returns to shareholders (at least 20 percent worse than the overall market in any one month).
volume risk is a commodity risk which refers to the fact that a player in the commodity market has uncertain quantities of consumption or sourcing , i.e. production of the respective commodity . examples of other circumstances which can cause large deviations from a volume forecast are weather ( e.g. temperature-changes for gas consumption ) , the plant-availability , the collective customer outrage , but also regulatory interventions . 
volume risk is a commodity risk which refers to the fact that a player in the commodity market has uncertain quantities of consumption or sourcing, i.e. production of the respective commodity. examples of other circumstances which can cause large deviations from a volume forecast are weather (e.g. temperature-changes for gas consumption), the plant-availability, the collective customer outrage, but also regulatory interventions.
volume risk is a commodity risk which refers to the fact that a player in the commodity market has uncertain quantities of consumption or sourcing, i.e. production of the respective commodity. examples of other circumstances which can cause large deviations from a volume forecast are weather (e.g. temperature-changes for gas consumption), the plant-availability, the collective customer outrage, but also regulatory interventions.