New measures and procedures to manage financial risk with applications to the planning of gas commercialization in Asia
This paper presents some new concepts and procedures for financial risk management. To complement the use of value at risk a new concept. upside potential or opportunity value as means to weigh opportunity loss versus risk reduction as well as an area ratio are introduced and discussed. Upper and lower bounds for risk curves corresponding to the optimal stochastic solution are developed, the application of the sampling average algorithm, one scenario at a time, is analyzed, and the relation between two-stage stochastic models that monage risk and the use of chance constraints is discussed. Finally, some anomalies arising from the use of value at risk and regret analysis are pointed out. These concepts are applied to the commercialization of gas and/or gas-derivatives (synthetic gasoline, methanol, and ammonia) in Asia. Results show that, given the set of costs chosen, the production of synthetic gasoline should be the investment of choice and that the use of contracts can increase expected profit. Other suboptimal cases are also revealed and it is shown how financial risk can be managed. (C) 2004 Elsevier Ltd. All rights reserved.
financial risk planning robust optimization