Volume risk, also known as quantity risk, is the risk of production or sales volumes materially and adversely deviating from their expected quantities.Volume Risk
openriskmanual.org It is context-specific.

Application

As regards

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 ...

, a major concern is yield risk, which is the uncertainty regarding production fearing insufficient quantities of the respective

commodity In economics, a commodity is an economic goods, good, usually a resource, that specifically has full or substantial fungibility: that is, the Market (economics), market treats instances of the good as equivalent or nearly so with no regard to w ...

mined, extracted or otherwise produced. A participant here further faces uncertainty concerning demand, where large deviations from the forecasted volume may be caused, for example, by unseasonal weather impacting gas consumption. Other concerns include plant availability, collective customer outrage, and regulatory interventions. These changes in

supply and demand In microeconomics, supply and demand is an economic model of price determination in a Market (economics), market. It postulates that, Ceteris_paribus#Applications, holding all else equal, the unit price for a particular Good (economics), good ...

often result in

market volatility In finance, volatility (usually denoted by " σ") is the degree of variation of a trading price series over time, usually measured by the standard deviation of logarithmic returns. Historic volatility measures a time series of past market pric ...

. Producers here are relatedly subject to

price risk Market risk is the risk of losses in positions arising from movements in market variables like prices and volatility. There is no unique classification as each classification may refer to different aspects of market risk. Nevertheless, the mo ...

, although in a narrower sense than usually employed. In the context of business risk, volume risk relates primarily to

revenue In accounting, revenue is the total amount of income generated by the sale of product (business), goods and services related to the primary operations of a business. Commercial revenue may also be referred to as sales or as turnover. Some compan ...

, where deviation from

budget A budget is a calculation plan, usually but not always financial plan, financial, for a defined accounting period, period, often one year or a month. A budget may include anticipated sales volumes and revenues, resource quantities including tim ...

may be due to external or internal factors. Internal factors, such as insufficient

human capital Human capital or human assets is a concept used by economists to designate personal attributes considered useful in the production process. It encompasses employee knowledge, skills, know-how, good health, and education. Human capital has a subs ...

and plant aging, may negate the business line's ability to execute the operational or

business plan A business plan is a formal written document containing the goals of a business, the methods for attaining those goals, and the time-frame for the achievement of the goals. It also describes the nature of the business, background information on ...

. External factors comprise primarily of the

competitive landscape Competitive landscape is a business analysis method that identifies direct or indirect competitors to help comprehend their mission, vision, core values, niche market, strengths, and weaknesses. Based on the volatile nature of the business world, wh ...

. A

public–private partnership A public–private partnership (PPP, 3P, or P3) is a long-term arrangement between a government and private sectors, private sector institutions.Hodge, G. A and Greve, C. (2007), Public–Private Partnerships: An International Performance Revie ...

(PPP), carries what is there referred to as "revenue risk".

Risk management

Risk management Risk management is the identification, evaluation, and prioritization of risks, followed by the minimization, monitoring, and control of the impact or probability of those risks occurring. Risks can come from various sources (i.e, Threat (sec ...

entailsVolume Risk
capital.com formally modeling demand and responding dynamically (if not preemptively) to the market.

Scenario planning Scenario planning, scenario thinking, scenario analysis, scenario prediction and the scenario method all describe a strategic planning method that some organizations use to make flexible long-term plans. It is in large part an adaptation and gen ...

may explicitly incorporate varying levels of demand. For PPPs, a tax-supported minimum revenue guarantee (MRG), may be provided by the (local) government. Regarding production uncertainty, an approach often taken is to diversify spatially;Volume Risk and Price Risk
TAS Royalty Company it may also be possible to allow for contingencies in plant availability. Direct hedging, however, becomes difficultYumi Oum, Shmuel Oren, Shijie Deng (2006)
"Hedging Quantity Risks with Standard Power Options in a Competitive Wholesale Electricity Market"
''Naval Research Logistics''. Vol. 53. when the quantity is uncertain, particularly where the underlying commodity is not storable. One approach is to hedge against fluctuations in total, i.e. quantity times price. Various strategies have been developed using, for example,

weather derivative Weather derivatives are financial instruments that can be used by organizations or individuals as part of a risk management strategy to reduce risk associated with adverse or unexpected weather conditions. Weather derivatives are index-based instr ...

s and electricity options. At the same time, producers and their customers regularly hedge against price risk using Bloomberg.com (2022)
5 things new commodities hedgers need to know
/ref> available commodity derivatives.

Commodity trader A commodity market is a market that trades in the primary economic sector rather than manufactured products. The primary sector includes agricultural products, energy products, and metals. Soft commodities may be perishable and harvested, w ...

s will similarly have hedges in place for the resultant

market Market is a term used to describe concepts such as: *Market (economics), system in which parties engage in transactions according to supply and demand *Market economy *Marketplace, a physical marketplace or public market *Marketing, the act of sat ...

and

volatility risk Volatility risk is the risk of an adverse change of price, due to changes in the volatility of a factor affecting that price. It usually applies to derivative instruments, and their portfolios, where the volatility of the underlying asset is a ...

References

Market risk Commodities Risk management in business Revenue {{finance-stub

Application

Risk management

See also

References