Typical attributes

Speculating around assets

Trading around assets

Objective

Quick gain from commodity price move

Incremental gains from exercise of embedded options

Risk level

High

Low to medium

Frequency of trades

High

Low to medium

Risk exposure transparency

Low, but perceived as high – most focus is on  exposure created via discrete trades and not assets

High, but difficult to track as  exposure is embedded in asset ownership

Risk exposure stability

Stable, other than option greeks since change due to assets is ignored

Unstable, constantly changing due to operational events and decisions

Risk source

Any instruments: swaps, options, etc.

Exotic path-dependent options embedded in assets

Operational considerations: asset capabilities, logistical, environmental, reliability

Typically ignored. Focus is on speculative gain

Asset operating constraints affect position and P&L and are vital to  decision making

Profit and loss (P&L) isolation (attribution), being able to identify the associated P&L to get the cost of capital and operation

Low, but perceived as high – focus is on speculative trades, asset P&L is mixed up with the rest of company and not tracked separately

High, but difficult to maintain due to internal transfer pricing of asset inputs & outputs, and allocation of capital and operating & maintenance costs. Asset P&L is kept separately from the rest of company

P&L stability

Driven by commodity price only

Driven by commodity price and complex operational issues

Risk system requirements

Common off-the-shelf solutions, transaction oriented system

More complex, customised, capacity oriented systems, customized features