PORTFOLIO MANAGEMENT
impacts of potential credit changes including counterparty, collateral, contract, and exposure risks.
• Financial analysis to estimate revenues, costs, profits, and
various key financial measures for different scenarios.
• Risk management to calculate various risk measures for
multiple volumetric and financial metrics needed for making decisions.
return and/or reduce its risk.
2. Computational Capability: A computational infrastructure is needed to enable the performance of needed simulations and analysis within a reasonable time. Computational issues are the most significant challenge facing the implementation of portfolio management in the energy industry due to two main reasons:
• Stochastic simulation is by itself a major challenge given the complexity associated with
simulating physical assets, a process that can be quite difficult to accomplish within a reasonable runtime (particularly for a reasonable number of scenarios).
• Identifying a reasonable set of portfolio changes that have the potential of reducing estimated
portfolio risk and/or improving estimated portfolio returns. Stochastic simulation of a number of alternative portfolios, a process that builds on the stochastic simulation of the existing portfolio, creates additional computational challenges that include both runtime and data management issues.
3. Rigorous Analytics: Rigorous
solutions are extremely important in risk management. While lack of rigor can simply imply a lack of accuracy or precision in many cases, the case is unfortunately considerably more complicated and serious in risk management where inadequate attention to analytical rigor can create misinformation and misleading answers. As discussed earlier, risk and portfolio management is a process that capitalizes on correlations and diversification; poor representation and handling of this core concept can lead to wrong solutions and bad outcomes. The challenge is to find a delicate balance that enables good analytics while avoiding the rather common and notorious trap of paralysis by analysis.
IT Source: Abacus Solutions Inc.
• Optimization tools to identify realistic and practical changes that can increase portfolio
4. Integrated Solutions: The energy trading and risk management space continues to rely on too many applications that are often poorly integrated. Lack of integration can lead to costly inefficiencies, risky inconsistencies, and very difficult situations. Most efforts to integrate disparate systems often face insurmountable challenges and fail to achieve needed objectives; resulting outcomes range from “flawed integration” where inconsistent data is meshed into an illogical nonsensical and unrealistic perspective to “spreadsheet integration” where a set of tools (often spreadsheets) are used to consolidate and reconcile different solutions from different tools and applications. None of these approaches solve the integration challenge and most are prone to serious errors and mistakes. A seamless integrated solution avoids all of these challenges by offering multiple applications with consistent data structures, reconciled analytics, rigorous solutions, and logical interoperability on a single platform.
Second Generation CTRM First generation energy/commodity trading and risk management systems trace their beginnings
Figure 3: Second Generation CTRM Systems Full
Simulation Market Simulation
Parameters Estimation
Back Office Integration Position Management Trade Capture Market Integration First Generation Analytics Source: Abacus Solutions Inc. December 2010 27 Optimization Portfolio Management
Real Time
Figure 2: Portfolio Management Applications
Next Generation
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