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Risk Management — Using MarketBuilder to Inform Key Decisions

Analyzing market risk using probability distribution over price, basis, cost, and profit

RiskMgmtICON

Deloitte MarketPoint enables customers to focus 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.

Our approach combines MarketBuilder 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 effective representations of market uncertainty, which are the key drivers of profitability and other uncertainty.

Profitability TreeProfitability Tree

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, bases, capacity additions, and other parameters of interest. MarketBuilder helps you to use decision tree structures, as shown by the diagram on the left, to create a view based on fundamentals over the risks and returns of your business, as shown by diagram below, representing an authentic probability distribution over profit.

Each MarketBuilder scenario is weighted by the probability of that path through the tree

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 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 the 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, and helping users to analyze market fundamentals under a variety of prospective conditions.

profitability distribution smProbability Distribution

In summary, using Deloitte MarketPoint's approach to risk analysis with MarketBuilder helps you place risk and uncertainty analysis at the center of your decision making, as well as formulate and justify decisions based on good information and a time-tested methodology.