Managing Risk under New Climate Legislation

Analysis Group has helped companies assess complex investment and risk management problems and implement strategies in the face of the high regulatory uncertainty and volatility of prices in today's energy markets. In a recent assignment, an Analysis Group team led by Managing Principals Brian S. Gorin and Marc Van Audenrode performed a series of technical financial analyses to help a leading natural resource company mitigate the risks of its investments in current energy markets -- including the risks posed by national climate policies.

For these analyses, we employed statistical modeling to simulate future market conditions in the context of potential policy changes. As part of our simulation, we considered potential financial hedges that the company could employ to balance the risks imposed by existing operations and future investments being considered. Our analysis also took into account the use of alternative financial instruments (e.g., forwards, puts, calls, and more complex derivatives) and the realities of available financial products in energy markets, where the great variation in market liquidity for alternative financial products poses both challenges and opportunities for developing effective hedging strategies.

Based on our analyses, our client was able to develop a risk management strategy consisting of a combination of contractual and market mechanisms. This strategy allowed it to move forward with its planned investment.

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