Koch is working to develop an indicator that will help to detect markets that are on the verge of the transition between these modes. It is an important safeguard against exposures that aren t picked up by scenario analysis that could mount up if left unattended. Beyond trading, Koch is also working to understand the risk to business asset values. That means the associated risk is actually more like an interest rate risk than a commodity price risk but unlike interest rate risks, there isn t such a liquid market for pipelines. So the risk profile can t be adjusted as frequently.
Credit risk is another concern.
The expected losses that characterise Koch s business are small, but the unexpected losses are potentially devastating. Credit risk in energy tends to be concentrated with little portfolio benefit and many strong counterparts. It takes quite a bit to make a loss on companies like BP or Exxon, says Hofmann, and as far as everyone else is concerned, you mitigate the heck out of it. That might be a multi-sigma event, but it demonstrates that these things do happen and that the dollars at risk are large when they do. Once again, it s a question of education and communication.