Unless embraced as an integral part of the business strategy, risk management is nothing more than a bureaucratic exercise that lulls the management and directors into a false sense of security...
Business & Money
view their positions on a rolled-up monthly basis, but they want the ability to drill down instantly to see details of their positions at the daily or hourly level. Developing a system that can meet these disparate needs in real time without becoming overwhelmed by data storage or processing requirements can be achieved only by following a rigorous design standard and applying advanced supporting technology.
First, all transactions should be valued at an hourly level for the entire term of the transaction. Regardless of the contractual nature of transactions, each deal must be valued at a granular level, preferably hourly, or in some cases sub-hourly. The more granular your positions, the more flexibility you will have to roll up and summarize the position for varied types of analysis. Taking a shortcut and marking all hours of a block product to a block price makes computation easier; however, one's ability to disaggregate the position and reaggregate along another dimension at a later date will be impossible.
Hourly positions must be maintained in forward months-but only for the attributes that matter from a position and risk-management perspective. For example, hourly representations of positions in forward months by location and pricing point are critical, while a monthly representation of position by counterparty is generally sufficient. A thoughtful review of which dimensions are important on an hourly versus a rolled-up view in forward months can reduce processing and storage requirements to a fraction (less than 10 percent) of a full hourly representation of all positions.
Second, to meet the demanding requirements of long-term market makers and traders, summarized positions should be maintained for all months. Most queries of positions beyond the spot month will be for monthly records. Keeping data in this rolled-up format allows data to be retrieved extremely quickly without incurring expensive roll-up operations with each query.
Finally, where possible, deals should be classified as specific delivery products that are generally consistent with products quoted in the market. This ap-proach has several benefits. Deal entry and position determination are streamlined, eliminating the most common cause of deal-entry error. A trader's position can be represented as a collection of different products that are denominated in the units where he can trade. For example, rather than classifying a series of trades as just off peak, a trader is aided by the classification of three separate off-peak products that may include 5x8, 2x16, and 2x8. When the trader sees the position represented in this manner, he or she quickly can do mega-watt/megawatt-hour conversions and monitor every position represented in the units in which trades typically will be executed in the market. Trading products can be matched with transmission products at a rolled-up level without having to worry about data that does not match up.
Technology has evolved to the point where enormous amounts of data can now be managed down to the smallest detail. The size and sophistication of today's power portfolios demand systems that can measure, monitor, and control position and risk management. Scarcely one year after embarking on the project, Cinergy has successfully implemented the