Browsing by Subject "Risk management"
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Item Open Access A Modeling Tool for Fuel Price Risk Management in Power Generation Portfolio Planning(2012-04-25) Sercy, KennethPower plants are significant capital investments whose returns are largely determined by such uncertain factors as future fuel prices and environmental regulations. Traditionally regulated utilities in the United States initiate power plant investment decisions through a process called Integrated Resource Planning (IRP). The aim of this centralized planning approach is to comprehensively assess both supply-side and demand-side options for satisfying load in the utility’s service territory over the next 20-30 years, and to establish a road map of actions that will serve load at least cost while adhering to reliability standards. Given the current level of uncertainty associated with many types of power plant investments, industry experts have identified a need for innovative planning practices within the IRP framework that can highlight resource tradeoffs, consider a variety of outcome metrics, and test a broader range of resource portfolios. This document describes the development and evaluation of a decision tool that is capable of capturing the tradeoff between upfront capital costs and fuel price risk in power plant investment decisions. An adaptation of mean-variance portfolio theory (MVP), a financial risk management framework, serves as the foundation of the model. As an extension of previous applications of MVP to power sector planning, this project explores the potential for implementing a parametric approach to fuel price inputs as well as a multi-period decision structure. The decision tool is evaluated under five input scenarios that represent different possible future fuel price trajectories and greenhouse gas emissions concerns. Results suggest that the parametric fuel price modeling methodology demonstrated here may be a valuable approach to future IRP applications of MVP. The multi-period structure is problematic in that outputs cannot be compiled across periods. Additionally, use of a widely accessible but computationally limited software platform precludes sufficient representation of economies of scale in power plant construction. Although these drawbacks may limit MVP applications to the exploratory analysis phase of IRP, with further development, the decision tool developed here could be useful in addressing some of the limitations of current IRP practices with respect to decision-making under uncertainty.Item Open Access Environmental Risk Sharing in the Oyu Tolgoi Mining Project(2007-05) Mancinelli, LauriIn 2005, Ivanhoe Mines Ltd. released a development plan for open pit and underground copper and gold mining of the Oyu Tolgoi porphyry deposits in Mongolia’s Gobi desert. Ivanhoe refers to the project as the largest copper-gold development project in the world. Under Mongolian law, the national government maintains ownership of all mineral reserves, and private parties license exploration and mining rights from the government. A contract agreement between the government and the private mining company stipulates the terms of the license. The size of the state’s share in the copper deposit will be determined by the contract and the Minerals Law of Mongolia. The purpose of this project is to analyze how the contract under consideration distributes environmental risk when environmental financial assurance is included. The basis for this analysis is a cash flow model developed by Robert Conrad for the Open Society Forum Mongolia and Revenue Watch. Two new cash flow models are created by adding self insurance and environmental fund assurance schemes to the Conrad model. Monte Carlo simulations are used to estimate the effects of environmental damages on the relative risk shares born by the Mongolian government and Ivanhoe Mines. Under both financial assurance models, risk shares diverge as the probability that environmental damage will occur increases. Risk shares also diverge as damages increase. The sum of the standard deviations on NPV to the government and the investor is higher than the standard deviation on the NPV to the project as a whole. The results of this analysis are general with respect to the contract but independent of the environmental parameters. The results also imply that the interactions between environmental assurance and other contract terms will ultimately determine the value of the project to the parties. Given the current contract structure, any risk of environmental damages will necessarily result in a cost to the government. This risk may be unnecessary and may dampen any development benefits of the Oyu Tolgoi license.Item Restricted "Modeling and Forecasting Realized Volatility"(2003) Andersen, TG; Bollerslev, T; Diebold, FX; Labys, PWe provide a general framework for integration of high-frequency intraday data into the measurement, modeling, and forecasting of daily and lower frequency return volatilities and return distributions. Most procedures for modeling and forecasting financial asset return volatilities, correlations, and distributions rely on potentially restrictive and complicated parametric multivariate ARCH or stochastic volatility models. Use of realized volatility constructed from high-frequency intraday returns, in contrast, permits the use of traditional time-series methods for modeling and forecasting. Building on the theory of continuous-time arbitrage-free price processes and the theory of quadratic variation, we develop formal links between realized volatility and the conditional covariance matrix. Next, using continuously recorded observations for the Deutschemark / Dollar and Yen / Dollar spot exchange rates covering more than a decade, we find that forecasts from a simple long-memory Gaussian vector autoregression for the logarithmic daily realized volatilities perform admirably compared to a variety of popular daily ARCH and more complicated high-frequency models. Moreover, the vector autoregressive volatility forecast, coupled with a parametric lognormal-normal mixture distribution implied by the theoretically and empirically grounded assumption of normally distributed standardized returns, produces well-calibrated density forecasts of future returns, and correspondingly accurate quantile predictions. Our results hold promise for practical modeling and forecasting of the large covariance matrices relevant in asset pricing, asset allocation and financial risk management applications.Item Open Access Risky Business: The Economy of Self-Management in Eighteenth-Century British Fiction(2020) Carozza, Davide GuidoThis study argues that in the eighteenth century a discourse of risk management emerged that fundamentally reshaped the relation of man to the world by imagining that the individual was capable of controlling aspects of life that had hitherto been left to God or fate. This shift, moreover, established one of the defining characteristics of modernity, linking individual autonomy to the process of managing risk in a manner that not only remains with us today, but has been so thoroughly naturalized that we are no longer aware of how it shapes everyday life. When eighteenth-century fiction and philosophy first began to link selfhood to the ability to manage risk, the dangers an individual faced were all potentially lethal threats to the body: shipwreck, cannibalism, plague, kidnapping, rape. As the notion of individuality as a reflexive defense against the dangers of the world came to be better established, the nature of these threats changed. Rather than dangers to the body, social risks became the focus of authors I call risk theorists. Individual autonomy now meant policing the boundaries of a particular representation of oneself in society. This new formation of selfhood at first depended on a powerful anxiety about avoiding the emotional influence of others, but as this risk too came to seem manageable external threats melted away. What was left were the psychological operations of an individual forced to read social cues, knowing that failure to do so meant inviting the condemnation of others. The greatest risk to an individual now came from their own mind when they failed to discover and perform the right social procedures.
The study begins by focusing on the intermixed physical and economic risks that shape the works of Daniel Defoe, who established the need for a modern individual to circulate in a dangerous world in order to secure for himself better standing in society. In Robinson Crusoe (1719) and A Journal of the Plague Year (1722) Defoe explicitly rejects the notion that one should take the safest path in life, forcing his protagonists to move through a world they know to be dangerous even when that choice seems superficially unreasonable. Samuel Richardson then translated these intermingled risks into sexual terms in Clarissa (1748), telling the story of a woman who knows that defending herself against a rapist means risking financial destitution. Rather than choose her virtue or her livelihood she charts a third course, valuing her sense of self over the safety of her body and dying in order to ensure that she controls how her story is told.
In the first two decades of the eighteenth century, periodical writers Joseph Addison and Richard Steele began the process of rendering risk in social terms by establishing a discourse of taste which Adam Smith takes up in both his moral philosophy and economic writings. Smith sees the logic of good taste through to its natural conclusion in A Theory of Moral Sentiments (1759) when he defines the modern individual through his ability to seal himself off from the poor judgment and excessive emotions of others. Smith then brings the moderation and reserve of the individual to an economic and thus global scale in The Wealth of Nations (1776). Finally, Jane Austen completes the internalization of risk management in Emma (1815), where the ability to confront the dangers of the world is rendered in fully psychological terms. Emma’s evolution as a risk manager depends not on her capacity to seal herself from the outside world, but on her ability to correctly read the intentions and desires of others and judge whether and how they can be compatible with her own.