Risk and Uncertainty – Using MarketBuilder to inform key decisions
Analyzing risk using probability distribution over price, basis, cost, and profit
Many risk analysis systems use a “Monte Carlo” framework that requires input of the probability distribution for commodity prices; this approach does not magically get you the right answer. Typically, the success of such approaches is marginal because it is so difficult to get the key input (probability distribution for price) correct.
MarketPoint advocates another approach that enables customers to focus their probabilistic analysis on key fundamental variables, such as shale gas availability or LNG cost, for which they typically have data and/or a good intuitive understanding.
The MarketPoint approach combines MarketBuilder (Deloitte MarketPoint’s premier decision-support software solution) calculations (deterministic model calculations) with probability distributions over key variables in the form of a probability tree (as depicted in the diagram below) in order to generate probability distributions over prices, basis, margins, etc. These variables can be much more reliable and authentic as representations of market uncertainty, which are the key drivers of profitability and other uncertainty.
A part of a recent project is depicted in the diagram above. The probability structure represented by the tree specifies model scenarios that can be run in MarketBuilder to generate an explicit probability distribution over prices, quantities, basis, capacity additions, and other parameters of interest. MarketBuilder and this method, help you to use decision tree structures as in diagram above to create a fundamentally-based view over the risks and returns of your business as shown in the second diagram below, representing an authentic probability distribution over profit. MarketPoint can help you utilize a deep, probabilistic quantification and analysis compared to less reliable methods like “Real Options” or “Monte Carlo Simulations” that lack the probabilistic and fundamental basics.
MarketBuilder is designed to help companies with sophisticated and reliable risk and uncertainty analysis to support more informed decision making. It offers a number of differentiating dimensions that facilitate analyzing markets at a global and/or regional level by altering particular factors to examine the combined effects of different variables on the market—prices, basis differentials, flowing quantities, capacity additions – all on a probabilistic basis.
MarketBuilder models the supply chains for energy commodities pertinent to your risk and uncertainty analysis and helps you determine their impact on your risk and return. You are able to utilize off-the-shelf models we provide in MarketBuilder or customize them using your proprietary information and MarketBuilder’s easy-to-use capabilities. MarketBuilder also facilitates easy addition of potential new assets to a region to simulate how they might impact market behavior. In MarketBuilder, each component of each supply chain is treated as an independent agent, competing against all of the other components, just as they do in the real-world markets, helping users to analyze market fundamentals under a variety of prospective conditions.
In summary, using MarketPoint’s approach to risk analysis with MarketBuilder helps you place risk and uncertainty analysis at the center of your decision making, formulating and justifying decisions based on good information and a time-tested methodology.
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