New measures and procedures to manage financial risk with applications to the planning of gas commercialization in Asia

This paper presents some new concepts and procedures for financial risk management. To complement the use of value at risk a new concept, upside potential or opportunity value as means to weigh opportunity loss versus risk reduction as well as an area ratio are introduced and discussed. Upper and lower bounds for risk curves corresponding to the optimal stochastic solution are developed, the application of the sampling average algorithm, one scenario at a time, is analyzed, and the relation between two-stage stochastic models that manage risk and the use of chance constraints is discussed. Finally, some anomalies arising from the use of value at risk and regret analysis are pointed out. These concepts are applied to the commercialization of gas and/or gas-derivatives (synthetic gasoline, methanol, and ammonia) in Asia. Results show that, given the set of costs chosen, the production of synthetic gasoline should be the investment of choice and that the use of contracts can increase expected profit. Other suboptimal cases are also revealed and it is shown how financial risk can be managed.

[1]  Robert J. Vanderbei,et al.  Robust Optimization of Large-Scale Systems , 1995, Oper. Res..

[2]  Efstratios N. Pistikopoulos,et al.  Simultaneous incorporation of flexibility and economic risk in operational planning under uncertainty , 1994 .

[3]  Eswaran Subrahmanian,et al.  Design and planning under uncertainty: issues on problem formulation and solution , 2003, Comput. Chem. Eng..

[4]  J. F. Benders.  Partitioning procedures for solving mixed-variables programming problems , 1962 .

[5]  Jacques F. Benders,et al.  Partitioning procedures for solving mixed-variables programming problems , 2005, Comput. Manag. Sci..

[6]  Linus Schrage,et al.  OR Practice - A Scenario Approach to Capacity Planning , 1989, Oper. Res..

[7]  Miguel J. Bagajewicz,et al.  Integrating Budgeting Models into Scheduling and Planning Models for the Chemical Batch Industry , 2003 .

[8]  Costas D. Maranas,et al.  Market-based pollution abatement strategies: Risk management using emission option contracts , 2003 .

[9]  Phhilippe Jorion.  Value at Risk: The New Benchmark for Managing Financial Risk , 2000 .

[10]  Klaus D. Timmerhaus,et al.  Plant design and economics for chemical engineers , 1958 .

[11]  Miguel J. Bagajewicz,et al.  Use of inventory and option contracts to hedge financial risk in planning under uncertainty , 2004 .

[12]  Luis Puigjaner,et al.  Risk Management in the Scheduling of Batch Plants under Uncertain Market Demand , 2004 .

[13]  James L. Riggs.  Economic Decision Models for Engineers and Managers , 1968 .

[14]  M. Wendt,et al.  Nonlinear Chance-Constrained Process Optimization under Uncertainty , 2002 .

[15]  A. Vries.  Value at Risk , 2019, Derivatives.

[16]  Alexander Shapiro,et al.  The Sample Average Approximation Method Applied to Stochastic Routing Problems: A Computational Study , 2003, Comput. Optim. Appl..

[17]  Miguel J. Bagajewicz,et al.  Managing financial risk in planning under uncertainty , 2004 .