Risk Management Issues From Electricity Industry - 2134 Words

2.0 RISK MANAGEMENT ISSUES FROM ELECTRICITY INDUSTRY. Risk management is an important part of any business, before you manage a risk u must identified the risk involved in that business first. In electricity industry companies are exposure to higher risks today than the early part of the sector (European Union of the electricity industry, 2006). Exposures to regulatory and market risks, to be specific, have it increased notably which can lead to either negative or positive impact on profit limits. In many European countries today, deregulation forced divide the ownership between non-regulated and regulated activities, leaving portion of the business such as wholesale, generation and retail without the protection of stable, measured cash flow. In electricity industry we have four main risks facing the sector which are the market risk, operational risk, credit risk and business risk. MARKET RISK This is the risk of financial gain or loss due to exposure to movement in market prices. The four standard market risks are currency risk, equity index risk, interest rate risk and commodity risk. Currency risk is a financial risk that occurs when a financial transactions is denominated in a currency other than that of the company based currency. Equity index risk is the financial risk that has to do with the holding equity in a specific investment. The risk in equity can be measure with the standard deviation of a security price over a specific period of time. 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