In risk management, valuations of physical commodity trades and assets are often challenging due to modeling complexity. This complexity arises naturally from the physical characteristics of the commodity, for example, gas storage characteristics or quality parameters in oil or coal, or from delivery and logistics-related complexities. Physical long-term contracts found in commodity markets like oil, natural gas and LNG usually include optionality in quantity, pricing, and delivery location. Many variables that influence the final PnL of such deals are stochastic and interdependent. Risk managers at commodity trading companies or utilities are experimenting with building appropriate models to value these deals under uncertainty. They tend to develop their own bespoke models and usually do not trust CTRM vendors’ standard offerings. Topaz, with its focus on risk management and quantitative analytics, has created an environment where each risk manager can represent the complexity of physical trades in line with their own valuation approach, while still working within the system’s standard reporting framework. The handling of physical assets starts with deal capture, where pricing is the deal component with the most diversification. The invoiced price of a long-term gas or LNG trade may depend on external indices, delivered quantity, location, currency exchange rates,… continue reading