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Volume risk (or, quantity risk) refers to production- or sales volumes materially and adversely deviating from their expected quantities.[1] [2] The term will have context specific applicability.
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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. |
As regards commodity risk, [3] a major concern is uncertainty re production - often referred to as "yield risk" - i.e. insufficient quantities of the respective commodity, being mined, extracted or otherwise produced. A participant here further faces uncertainty concerning demand, where large deviations from 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 the deviation from budget may be due to external or internal factors.[1] Internal factors, such as insufficient human capital and aging plant, may negate the business line's ability to execute the operational or business plan. External factors comprise primarily of [1] the competitive landscape. A PPP, or Public–private partnership, carries what is there referred to as "revenue risk".[6]
Risk management entails [2] formally modeling demand and responding dynamically (if not preemptively) to the market. Scenario planning may explicitly incorporate varying levels in demand. [7] For PPPs, a tax-supported MRG, "minimum revenue guarantee", may be provided by the (local) government. [8][9] Re production uncertainty, an approach often taken is [5] to diversify spatially; it may also be possible to allow for contingencies in plant availability.
Direct hedging, though, "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] commodity-derivatives where available. Commodity traders will similarly have hedges in place for the resultant market- and volatility risk.
- Customer demand planning
- Commodity market
- Decision tree
- Demand risk
- Energy forecasting
- Financial forecast
- 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
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