Volume risk

Short description: Risk that changes in transaction or production volumes will affect financial outcomes

Example

An electricity retailer cannot accurately predict the demand of all households for a given time which is why the producer cannot forecast the precise time that a power plant will provide more electricity that consumed, even if the plant always delivers the same output of energy.

Volume risk, also known as quantity risk, is the risk of production or sales volumes materially and adversely deviating from their expected quantities.[1][2] The term has context-specific applications.

## Contents

* 1 Application
* 2 Risk management
* 3 See also
* 4 References

## Application

As regards commodity risk,[3] a major concern is yield risk, which is the uncertainty regarding production fearing insufficient quantities of the respective commodity mined, extracted or otherwise produced. A participant here further faces uncertainty concerning demand, where large deviations from the forecasted volume may be caused, for example, by unseasonal weather impacting gas consumption. Other concerns include[4] plant availability, collective customer outrage, and regulatory interventions. These changes in supply and demand often result in market volatility.[2] Producers here are relatedly subject to price risk,[5] although in a narrower sense than usually employed.

In the context of business risk, volume risk relates primarily to revenue, where deviation from budget may be due to external or internal factors.[1] Internal factors, such as insufficient human capital and plant aging, may negate the business line's ability to execute the operational or business plan. External factors comprise primarily of the competitive landscape.[1] A public–private partnership (PPP), carries what is there referred to as "revenue risk".[6]

## Risk management

Risk management entails[2] formally modeling demand and responding dynamically (if not preemptively) to the market. Scenario planning may explicitly incorporate varying levels of demand.[7] For PPPs, a tax-supported minimum revenue guarantee (MRG), may be provided by the (local) government.[8][9] Regarding production uncertainty, an approach often taken is to diversify spatially;[5] it may also be possible to allow for contingencies in plant availability.

Direct hedging, however, becomes difficult[10] when the quantity is uncertain, particularly where the underlying commodity is not storable. One approach is to hedge against fluctuations in total,[10] i.e. quantity times price. Various strategies have been developed using, for example, weather derivatives[11] and electricity options.[10] At the same time, producers and their customers regularly hedge against price risk using[12] available commodity derivatives. Commodity traders will similarly have hedges in place for the resultant market and volatility risk.

## See also

* Customer demand planning
* Commodity market
* Decision tree
* Demand risk
* Energy forecasting
* Electricity price forecasting
* Solar power forecasting
* Wind power forecasting
* Financial forecast
* Product forecasting
* Sales forecasting
* Financial risk management § Corporate finance
* Flexible manufacturing system
* FP&A
* Intensity option
* Mineral economics
* Mineral exploration
* Sales variance § Sales volume variance
* Supplier risk management
* Supply chain risk management
* Switching option
* Take-or-pay contract

## References

1. ↑ 1.0 1.1 1.2 Volume Risk, openriskmanual.org
2. ↑ 2.0 2.1 2.2 Volume Risk, capital.com
3. ↑ Kandl, Peter; Studer, Gerold (January 2001). "Factoring in volume risk". Risk Magazine: 84f. https://www.risk.net/risk-magazine/technical-paper/1530353/factoring-volume-risk. Retrieved 23 October 2015.
4. ↑ Pellegrino, R.; Tauro, D. (March 27, 2018). "Supply Chain Finance: A supply chain-oriented perspective to mitigate commodity risk and pricing volatility (in press)" (in en). Journal of Purchasing and Supply Management. doi:10.1016/j.pursup.2018.03.004. https://www.sciencedirect.com/science/article/pii/S1478409218300748.
5. ↑ 5.0 5.1 Volume Risk and Price Risk, TAS Royalty Company
6. ↑ Revenue Risk, APM Group
7. ↑ Jay Ogilvy (2015). "Scenario Planning and Strategic Forecasting", forbes.com
8. ↑ International Monetary Fund (2019). "PPP Fiscal Risk Assessment Model"
9. ↑ Global Infrastructure Hub (2016). "Allocating Risks in Public-Private Partnership Contracts"
10. ↑ 10.0 10.1 10.2 Yumi Oum, Shmuel Oren, Shijie Deng (2006). "Hedging Quantity Risks with Standard Power Options in a Competitive Wholesale Electricity Market". Naval Research Logistics. Vol. 53.
11. ↑ Takuji Matsumoto, Yuji Yamada (2021). "Simultaneous hedging strategy for price and volume risks in electricity businesses using energy and weather derivatives". Energy Economics. Volume 95, March 2021
12. ↑ Bloomberg.com (2022). 5 things new commodities hedgers need to know

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Financial risk and financial risk management

Categories|

| Credit risk|

* Concentration risk
* Consumer credit risk
* Credit derivative
* Securitization

|

Market risk|

* Commodity risk (e.g. Volume risk, Basis risk, Shape risk, Holding period risk]], Price area risk)
* Equity risk
* FX risk
* Margining risk
* Interest rate risk
* Volatility risk
* Liquidity risk (e.g. Refinancing risk)

Operational risk|

* Operational risk management
* Legal risk
* Political risk
* Reputational risk
* Valuation risk

Other|

* Profit risk
* Settlement risk
* Systemic risk

Modeling|

* Market portfolio
* Modern portfolio theory
* RAROC
* Risk-free rate
* Risk parity
* Sharpe ratio
* Sortino ratio
* Value-at-Risk (VaR) and extensions Profit at risk, Margin at risk, Liquidity at risk

Basic concepts|

* Diversification
* Expected return
* Hazard
* Hedge
* Risk
* Risk pool
* Systematic risk
* Financial law

* Financial economics
* Investment management
* Mathematical finance

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