PREDICTABLE SURPRISES


than $135, $150 and $200 per barrel respectively. The premiums for deep out of the money options are reflecting the higher degree of uncertainty around Iran.


Predictable Surprise? The term Predictable Surprises refers to “problems


that at least some people are aware of, are getting worse over time, and are likely to explode into a crisis eventually, but are not prioritised by key decision-makers or have not elicited a response fast enough to prevent severe damage.”1 Risk managers at energy and commodity firms


regularly conduct stress tests to determine what would be the impact in their portfolio of extreme adverse scenarios. However, when dealing with hypothetical scenarios such as a military confrontation with Iran, the inherent subjectivity in the choice of emerging threats or stress scenarios creates a serious problem in order to conduct an objective assessment of the value of the test. A natural solution to this problem is to bring


senior management representatives into stress test committees, and therefore making them accountable for the scenario design process and


Figure 4: Probabilities: that WTI prices could exceed certain levels in coming months 20% Price > $135 15%


10%


Price > $150 5% Price > $200 0 Source: NQuantX Global Commodity Workbench


resulting actions based on scenario results. The transfer of ownership of the business line risks into the senior management of the firm may create elements of moral hazard and perhaps reduce the accountability and independence of business line managers, but it also ensures that the senior management is aware of the impact of extreme


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