Profit at risk

Not to be confused with Profit risk.

Profit-at-Risk (PaR) is a risk management quantity in energy trading to measure price risk of a portfolio of physical and financial assets by determining the not-realized EBIT within a given holding period which will not be exceeded with a probability.[1] Mathematically, the PaR is the quantile of the profit distribution of a portfolio.

Example

If the confidence interval for evaluating the PaR is 95%, there is a 5% probability that due to changing commodity prices, the gross margin variation will exceed the PaR value over a holding period of e.g. 10 days.[2]

Typical parameter choices are holding periods 1 and 10 days as portfolio position and sensitivities change rapidly and mark-to-market (M2M) are usually evaluated on a daily basis. Banking supervision (like the German MaRisk) requires confidence levels between 95% and 99%.

Critics

In contrast to the traditional Value at risk, more advanced risk measures like the PaR, Earnings-at-Risk (EaR), the Liquidity-at-Risk (LaR) or the Margin-at-Risk (MaR), the exact (algorithmic) implementation rule vary from firm to firm.[3]

See also

References

  1. ↑ "What is Profit-at-Risk (PaR)?". .arbitrage-trading.com. ART Ltd. Retrieved 8 January 2016.
  2. ↑ "Risk Glossary". risk.net. Retrieved 8 January 2016.
  3. ↑ Burger, Markus. "Risk measures for large portfolios and their applications in energy trading" (PDF). risklab.es. EnBW Energie Baden-Württemberg AG. Retrieved 8 January 2016.
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