Volume risk
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| Example |
| 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. |
Volume risk, also known as quantity risk, is the risk of production or sales volumes materially and adversely deviating from their expected quantities.[https://www.openriskmanual.org/wiki/Volume_Risk Volume Risk], openriskmanual.org It is context-specific.
Application
As regards commodity risk,{{cite journal|last1=Kandl|first1=Peter|last2=Studer|first2=Gerold|title=Factoring in volume risk|journal=Risk Magazine|date=January 2001|page=84f|url=http://www.risk.net/risk-magazine/technical-paper/1530353/factoring-volume-risk|access-date=23 October 2015}} a major concern is yield risk, which is the uncertainty regarding production fearing insufficient quantities of the respective commodity mined, extracted or otherwise produced. A participant here further faces uncertainty concerning demand, where large deviations from the forecasted volume may be caused, for example, by unseasonal weather impacting gas consumption. Other concerns include{{cite journal|url= https://www.sciencedirect.com/science/article/pii/S1478409218300748|first1= R.|last1= Pellegrino|first2= D.|last2= Tauro|journal= Journal of Purchasing and Supply Management|title= Supply Chain Finance: A supply chain-oriented perspective to mitigate commodity risk and pricing volatility (in press)|language= en|doi= 10.1016/j.pursup.2018.03.004|date= March 27, 2018|s2cid= 169679135|url-access= subscription}} plant availability, collective customer outrage, and regulatory interventions. These changes in supply and demand often result in market volatility. Producers here are relatedly subject to price risk, although in a narrower sense than usually employed.
In the context of business risk, volume risk relates primarily to revenue, where deviation from budget may be due to external or internal factors. Internal factors, such as insufficient human capital and plant aging, may negate the business line's ability to execute the operational or business plan. External factors comprise primarily of the competitive landscape. A public–private partnership (PPP), carries what is there referred to as "revenue risk".[https://ppp-certification.com/ppp-certification-guide/121-revenue-risk-%E2%80%93-demand-or-volume-risk3 Revenue Risk], APM Group
Risk management
Risk management entails[https://capital.com/volume-risk-definition Volume Risk], capital.com formally modeling demand and responding dynamically (if not preemptively) to the market. Scenario planning may explicitly incorporate varying levels of demand.Jay Ogilvy (2015). [https://www.forbes.com/sites/stratfor/2015/01/08/scenario-planning-and-strategic-forecasting "Scenario Planning and Strategic Forecasting"], forbes.com For PPPs, a tax-supported minimum revenue guarantee (MRG), may be provided by the (local) government.International Monetary Fund (2019). [https://www.imf.org/external/np/fad/publicinvestment/pdf/PFRAM2.pdf "PPP Fiscal Risk Assessment Model"]Global Infrastructure Hub (2016). [https://ppp.worldbank.org/public-private-partnership/sites/ppp.worldbank.org/files/documents/GIHub_Allocating_Risks_PPP_Contracts_EN_2016.pdf "Allocating Risks in Public-Private Partnership Contracts"] Regarding production uncertainty, an approach often taken is to diversify spatially;[http://www.tasroyalty.com/blog/volume-risk-and-price-risk Volume Risk and Price Risk], TAS Royalty Company it may also be possible to allow for contingencies in plant availability.
Direct hedging, however, becomes difficultYumi Oum, Shmuel Oren, Shijie Deng (2006). [https://oren.ieor.berkeley.edu/pubs/I.A.87.pdf "Hedging Quantity Risks with Standard Power Options in a Competitive Wholesale Electricity Market"]. Naval Research Logistics. Vol. 53. when the quantity is uncertain, particularly where the underlying commodity is not storable. One approach is to hedge against fluctuations in total, i.e. quantity times price. Various strategies have been developed using, for example, weather derivativesTakuji Matsumoto, Yuji Yamada (2021).
[https://www.sciencedirect.com/science/article/pii/S0140988321000062 "Simultaneous hedging strategy for price and volume risks in electricity businesses using energy and weather derivatives"]. Energy Economics. Volume 95, March 2021 and electricity options. At the same time, producers and their customers regularly hedge against price risk usingBloomberg.com (2022). [https://www.bloomberg.com/professional/blog/5-things-new-commodities-hedgers-need-to-know/ 5 things new commodities hedgers need to know] available commodity derivatives. Commodity traders will similarly have hedges in place for the resultant market and volatility risk.
See also
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- Customer demand planning
- Commodity market
- Decision tree
- Demand risk
- Energy forecasting
- Electricity price forecasting
- Solar power forecasting
- Wind power forecasting
- Financial forecast
- Product forecasting
- Sales forecasting
- {{slink|Financial risk management#Corporate finance}}
- Flexible manufacturing system
- FP&A
- Intensity option
- Mineral economics
- Mineral exploration
- {{slink|Sales variance#Sales volume variance}}
- Supplier risk management
- Supply chain risk management
- Switching option
- Take-or-pay contract
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