Shape risk in finance is a type of

basis risk Basis risk in finance is the risk associated with imperfect hedging due to the variables or characteristics that affect the difference between the futures contract and the underlying "cash" position. It arises because of the difference between th ...

when hedging a

load profile In electrical engineering, a load profile is a graph of the variation in the electrical load versus time. A load profile will vary according to customer type (typical examples include residential, commercial and industrial), temperature and holi ...

with standard hedging products having a lower

granularity Granularity (also called graininess), the condition of existing in granules or grains, refers to the extent to which a material or system is composed of distinguishable pieces. It can either refer to the extent to which a larger entity is sub ...

. In other words a commodity supplier wants to pre-purchase supplies for expected demand, but can only buy in fixed amounts that are bigger or smaller than the demand forecasted. This means it has to either over order or under order and make up the difference at the time of delivery at the spot price which might be much higher. Shape risk is also related to

commodity risk Commodity risk refers to the uncertainties of future market values and of the size of the future income, caused by the fluctuation in the prices of commodities. These commodities may be grains, metals, gas, electricity etc. A commodity enterpris ...

. For example an electricity provider has to produce or buy electricity in advance in order to distribute to its consumers based on forecasts i.e. how much energy will be consumed every minute on the following day. Such forecasts are usually based on the average historical consumption of the same set of customers; however, the provider can only produce e.g. only hourly blocks of electricity of 1MWh, and not smaller quantities. There is a certain financial risk that the provider produces too little energy and thus has to buy the remaining power from a market opponent for a high

spot Spot or SPOT may refer to: Places * Spot, North Carolina, a community in the United States * The Spot, New South Wales, a locality in Sydney, Australia * South Pole Traverse, sometimes called the South Pole Overland Traverse People * Spot (prod ...

price to be able to fulfill the need of its customers.

References

{{Financial risk Market risk