risk management activities need a lot of market information, especially price information, and the company can accumulate a lot of information in the process of providing alternative contracts and prices for itself and customers. This information has become an important basic data for Enron's price risk management, which is difficult for other companies to obtain systematically.
Price risk management is realized through contract hedging. If Enron signed a long-term gas supply contract with a gas user at a floating price and was in a short position, and another power company signed a long-term electricity purchase contract at a floating price, it was in a long position. Because natural gas prices are highly correlated with electricity prices, electricity prices tend to rise when natural gas prices rise. In this way, because Enron is in a short position and a long position at the same time, the risk of price fluctuations can roughly offset each other. Because Enron deals in a large number of natural gas, electricity and other products, and provides a variety of price choices according to customers' needs, it holds a large number of contracts that can offset each other and thus offset risks. As long as it is carefully calculated and combined, it can effectively reduce risks.
Enron's initial accumulation of risk management skills stems from the exchange of various price choices in natural gas supply. For example, it provides both fixed-price contracts and floating-price contracts, and also provides prices calculated according to a certain formula. Different pricing of the same product forms the ability to lock the price at a certain level through combination. Enron takes advantage of this ability and extends it to cross-commodity price hedging of different commodities, such as the above-mentioned natural gas and electricity prices. Now, Enron can provide dazzling price risk management products, such as metal, coal, crude oil, fuel oil, LNG, steel, forest products, and even weather products, network products and other price risk management tools. The weather product mentioned here is a price risk management tool adopted by Enron. Because natural gas combustion is a competitive way of hydropower generation, the demand for natural gas is closely related to the weather. When the rainfall increases, the demand for natural gas decreases and the price of natural gas decreases accordingly. Therefore, the rainfall can be linked with the price of natural gas, and the risk management of natural gas price can be carried out. For example, a contract with rainfall as the target can be reached. When the future rainfall is lower than the predetermined level of both parties, Enron can compensate the gas power station at the corresponding price, which is a low-limit option contract with rainfall as the target asset. Similarly, it is also possible to sign a high limit option contract and a collar option (interval option) contract to manage the product price risk caused by weather changes.
Enron has the ability and skills to split, combine or package the involved trading contracts according to the risk management elements through a variety of products and price choices, and carry out complex price risk management activities with the help of the hedging mechanism of futures and options. This ability is not only a sharp weapon for the company to attract customers to enter new markets and new businesses, but also brings huge income and profit growth for the company. For example, the energy retail service, which focuses on providing risk management solutions, made the company's new service contracts reach $16 billion in 2, and its operating profit reached $13 million that year.