Company: Global Energy Trader
QuIC Market Risk Solution™ provides faster calculations, increases accuracy of hedging and business decisions
The Client
As one of the world’s largest energy companies, operating in over 100 countries, this client has major businesses in; transportation fuels, power, petrochemical products and a variety of retail services. Energy trading in power, oil, natural gas and emissions represents a significant portion of their profits.
The client approached QuIC seeking a market risk solution for their European gas and power trading business to calculate the inherent risk on in-house positions, stock holdings and sales as well as traded risk management needs for physical and paper options.
Says Nigel Cairns, President and CEO of QuIC, “They chose QuIC for this project because we have an established track record with them, and our market risk solution has all the essential components for the energy trading sector. When a major global enterprise like this becomes a repeat customer, it is proof of the value of our solutions. They know us, they trust our people to understand the full complexity of their risk management needs, and they have confidence in our commitment to deliver on time, and on budget.”
The Challenge
The client regularly engages in commercial oil and gas transactions of 25 years duration or longer. In the early years, these trades feature risk exposure in markets with liquidity, where risk can be hedged and incorporated into standard market risk (MVaR) systems. Beyond the liquidity limit, however, there are no market prices, and the standard assumptions that underpin MVaR approaches break down.
To calculate the risk on these transactions, the client had an existing solution—essentially a series of spreadsheets. Each calculation required manual input, and the system was slow, cumbersome and error-prone. Making modifications to risk factors or complex payoff structures was tedious and difficult.
For these 25+ year commercial contracts, a satisfactory market risk calculation requires simulated risk profiles generated from 20 years of spot prices, with 5,000 simulations producing 5,000 potential paths of the required commodities (including foreign exchange and inflation). The positions should then be valued and discounted to compute the 5,000 net present values (NPVs). QuIC was engaged to provide a “turnkey” risk management solution that would provide traders with the ability to run this type of calculation in real time.
The Solution
QuIC analyzed the client’s existing methodology and workflow, and then configured the QuIC Market Risk Solution to address the previous system’s structural weaknesses and speed issues. The client’s technology and business teams validated the QuIC design, and development proceeded.
Using scalable, modular financial analytics technology—including QuIC Script™ and the QuIC Platform™ —the complex risk and simulation models were developed. The solution included QuIC View™, which creates 3-D graphics for visual analysis. The core of the solution is the QuIC Engine™, an exceptionally fast vector-based calculation and simulation platform that provides a shared calculation fabric that can be utilized throughout the organization.
The client’s teams were trained in the use of the software, including the tools that allow risk models to be enhanced and adapted as required, and added to the company’s shared library.
Market risk analyzed with far greater accuracy, ease of use and flexibility
After extensive integration and user acceptance testing, the project was determined to have met every objective. It provides an interactive, flexible solution, and delivers results in a fraction of the time. Its increased speed permits complex calculations to be run several times daily, improving the validation of results.
The system’s speed allows far more accurate hedging and business risk decisions to be taken, and the accuracy and frequency of NPV calculations have increased board-level confidence in monthly reports. The project was delivered in four months, on time and on budget.
The QuIC Market Risk Solution™ provides the fastest calculations, and the most adaptable tools for accurate, real-time measurement of enterprise market risk, across virtually every asset class and risk factor. The calculation power of the QuIC Engine™ enables traders to run market VaR and credit PFE calculations on huge portfolios of complex instruments, and receive results in a fraction of the time required by competitive risk-management systems.
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