A risk management project starts with a high-level analysis of the value-chain mechanisms. Identifying the stakeholders, financial flows and impacting factors will provide a clear understanding of the business ‘model’ which is critical for further deep dive into risk management Once the above overview is well defined, we can dig deeper into technical analysis and list market risks the business is exposed to. To identify those, we will need to isolate the processes interacting with the market or having an impact on market exposure, e.g. new demand coming in. For each identified process, we can define and categorise the risk depending on the impacting factors. The two first steps of our process require market experience to dive into business flows and understand the risks associated with the business model.

Once the risks are clearly identified, we can focus on getting the most out of the available data, with both historical and forward analysis. For each of the identified risks, analysts can isolate the realised financial impact in the past data, and compare it to current risk premiums used in pricing. Then, they will generate multiple stochastic scenarios to predict the expected future risk. To mitigate these risks, market players must reduce their exposure to market volatility. They don’t have to limit themselves to the usual future market products but also have access to a whole range of financial tools, such as derivative products and insurances, or can use more strategic solutions such as vertical integration. The third and fourth steps, therefore, require both data analysis and quantitative modelling skills to evaluate the risks and pick the optimal mitigation strategy.