Two words deeply determine the world economic since the 90’s of the 20thcentury – “risk” and “RiskManagement”. However, coming to the result that these concerns have been ignored before that time would be seriously misinterpreted. Early trials to identify and analyse risks could be recognized by archaeological discoveries in the Euphrates-Tigris area and have been dated around the year 3.200 B.C. The economy already realized the importance of risks andRisk Managementat the beginning of modern economics. Today this concern is handled more exactly than in the Ancient World, with full awareness and more systematically. Taking risks more systematically into consideration is caused by more rapidly changing basic conditions in the world markets. But, what are the reasons for these developments? Some decades before the world economy proceeded in relative predictable channels and followed more or less fixed inherent laws. This could especially be noticed in many commodity markets, like the steam coal market. This market as a commodity market will be analysed in more detail in the scope of this diploma thesis. First hints for upcoming changes have been given by the oil crises in 1973. Up to this time, exorbitant increasing commodity prices could be observed only a few times and were not as serious. However, such increasing commodity prices and especially oil prices did not shake markets for twenty-five years and it turned out that the explosion of commodity prices could not be recognized till the end of the 20thcentury.
Table of Contents
1 INTRODUCTION TO THE TOPIC
2 BASICS AND DEFINITIONS
2.1 DEFINITION OF RISK
2.2 DESCRIPTION OF RISK MANAGEMENT
2.2.1 The definition of Risk Management
2.2.2 The Risk Management Process
2.2.3 Risk Management strategies
2.3 FINANCIAL VERSUS COMMODITY POSITIONS AND RELATED RISK REDUCTION
2.3.1 Differences between financial and commodity positions
2.3.2 Risk reduction for positions
3 EVALUATING PRICE RISKS OF POSITIONS BY THE VALUE-AT-RISK
3.1 THE PRINCIPLE OF THE VALUE-AT-RISK APPROACH
3.1.1 Value-at-risk related measures of (price) risks
3.1.2 Depicting the value-at-risk
3.1.2.1 The expression of the approach
3.1.2.2 Premises for the calculation
3.1.2.3 The value drivers
3.1.3 The various value-at-risk approaches
3.1.3.1 The variance-covariance method
3.1.3.2 The Historical Simulation
3.1.3.3 The Monte Carlo Simulation
3.2 EVALUATING APPLIED VALUE-AT-RISK APPROACH BY BACK-TESTING
3.3 A CRITICAL RECOGNITION OF THE VALUE-AT-RISK’S SERVICES
3.4 ALTERNATIVE CONCEPTS FOR MEASURING PRICE RISKS
3.5 EVALUATING POSITIONS BY THE VALUE-AT-RISK
3.5.1 Conditions and barriers for managing price risks by the value-at-risk
3.5.2 Value-at-risk based Risk Management in the financial sector
4 MANAGING PRICE RISKS IN THE INTERNATIONAL COAL TRADING BUSINESS
4.1 OUTLINING THE INTERNATIONAL STEAM COAL MARKET
4.2 RAG TRADING GMBH – PLAYER IN THE INTERNATIONAL COAL TRADING BUSINESS
4.3 EVALUATING POSITIONS BY THE VALUE-AT-RISK AT RAG TRADING GMBH
4.3.1 Depicting relevant risks at RAG Trading GmbH
4.3.2 Taken steps for evaluating trading positions at RAG Trading GmbH
4.3.3 Establishing a value-at-risk based evaluating process
4.4 RECOMMENDATION
5 CONCLUSION AND FURTHER OUTLOOK
Objectives and Topics
This thesis examines how companies, specifically in the steam coal trading sector, can systematically manage price risks using the value-at-risk (VaR) approach. It explores the transition of this financial risk management tool into the non-financial sector to provide more accurate and transparent risk assessment for trading positions.
- Fundamentals of risk and risk management in corporate environments.
- Detailed analysis of the value-at-risk methodology and its calculation variants.
- Application of VaR and supplementary risk measures in the international steam coal market.
- Case study of risk management practices at RAG Trading GmbH.
- Critical evaluation of the effectiveness and limitations of VaR in commodity trading.
Excerpt from the book
3.1.2.1 The expression of the approach
The value-at-risk is one of the most important measures for evaluating risks. The importance for international business increased within past years. This results in enabling financial markets to combine the measures of volatility and standard deviation.
The value-at-risk of portfolios or single positions is the loss or change in value that the holder might not expect to be exceeded with a given degree of confidence over a specified period of time. The degree of confidence, that reflects the occurrence probability is expressed by the term 1 – α (for example 1 – α = 99%). Assuming that the VaR of a portfolio, considering 99% confidence level over one day is 100,000 USD, the holder of a portfolio or single position does not have to expect to suffer a loss of more than 100,000 USD more often than once every hundred days. Thus, the value-at-risk enables enterprises to say that they are assured considering “X” percent of all occurrences not to lose more than “V” USD within upcoming “N” days.
Summary of Chapters
1 INTRODUCTION TO THE TOPIC: This chapter highlights the rising importance of systematic risk management in a globalized economy and sets the focus on the steam coal trading business.
2 BASICS AND DEFINITIONS: Provides foundational knowledge on risk terminology, categorizes different types of risks, and details the core components of the risk management process.
3 EVALUATING PRICE RISKS OF POSITIONS BY THE VALUE-AT-RISK: Explains the mathematical and conceptual principles of VaR, discusses various calculation approaches, and addresses critical limitations when applied in practice.
4 MANAGING PRICE RISKS IN THE INTERNATIONAL COAL TRADING BUSINESS: Analyzes the specific dynamics of the steam coal market and investigates how RAG Trading GmbH implements risk management strategies to handle price volatility.
5 CONCLUSION AND FURTHER OUTLOOK: Summarizes the findings regarding the transferability of VaR to the coal sector and offers final reflections on the necessity of integrated risk management.
Keywords
Risk Management, Value-at-risk, Steam Coal, Commodity Trading, Price Risk, Volatility, Portfolio Management, Back-Testing, Variance-Covariance Method, Historical Simulation, Monte Carlo Simulation, RAG Trading GmbH, Market Risk, Sensitivity Analysis, Risk Steering.
Frequently Asked Questions
What is the primary focus of this thesis?
The thesis focuses on managing price-related risks in the steam coal trading business by utilizing the value-at-risk (VaR) approach to evaluate trading positions.
What are the central thematic fields covered?
The work covers risk definition, the risk management process, statistical methods for risk measurement (VaR variants), and their practical application in the commodity industry.
What is the primary research goal?
The goal is to determine if the value-at-risk method, originally developed for the financial sector, can be successfully transferred and applied to the non-financial coal trading business.
Which scientific methods are employed?
The research uses a descriptive, theoretical approach combined with a practical case study analysis of RAG Trading GmbH, evaluating different quantitative risk assessment models.
What is discussed in the main part of the work?
The main part explains VaR calculation methods, explores market price indices (like API#2), and analyzes how companies can establish an effective, risk-aware evaluation process.
Which keywords define this work?
Key terms include Value-at-risk, Risk Management, steam coal, price risk, commodity trading, and portfolio analysis.
Why is the variance-covariance approach favored by RAG Trading GmbH?
It is favored for its simplicity and efficiency, allowing for quick risk estimation without the high cost and computational complexity associated with other simulation methods.
What does the case study of RAG Trading GmbH reveal about VaR?
The study reveals that while VaR provides a useful starting point for risk management, it must be complemented by other tools and human judgment, especially since commodity markets deviate from normal distributions.
- Quote paper
- Patrick Meinhard (Author), 2005, Management of price risks. Value at risk for evaluating trading positions in the coal market, Munich, GRIN Verlag, https://www.grin.com/document/54215
