Volume 3 — Valuation and Risk Metrics © Copyright 2002, CCRO. All rights reserved. 27 margin locked in, the less exposure the company has to changes in the market and the more stable the earnings will be over time. However, each company must decide the amount of activity to hedge given the risk tolerance of management and the current market conditions. This measure can be presented as a volume-based metric, a value-based metric, or a risk-based metric. 8.2 Calculation Value-based Metric The value-based metric can be calculated at a cumulative level, in various time buckets, or at an activity level. Contracted Revenue Stream of Hedges without Overheads Total Net Hedged Asset Value Where: Contracted Revenue Stream of Hedges without Overheads = (quantity *contract price of the output) – (quantity *contract price of the fuel cost) - associated direct costs such as variable O&M, etc. Total Net Hedge Asset Value = Fair Market Value of the Asset without Hedges + MTM of the Hedges See Appendix F for additional detail and examples. Volume-based Metric Volume of Hedge Transactions, Volume of Total Asset Output with Hedges The problem associated with calculating a volume-based metric is defining the volume base. Companies could calculate an open position or a delta equivalent position, include off-peak activity or exclude off-peak activity, etc. Risk-based Metric (VaR of the Asset without the Hedge – VaR of the Asset with the Hedge) (VaR of the Asset without the Hedge) The objective of this measure is to show by how much the risk around the asset is reduced through suitable hedging activity. This metric does not explicitly pick up the impact of the hedge in terms of the level of revenue streams that may have been locked through hedging around an asset.2. In order for this metric to be a meaningful measure of the level of hedging and its effectiveness, both the holding period and the level of liquidity available in the 2 The metric does pick up the impact of hedging indirectly, in that the difference in the numerator and the denominator will both be smaller if a greater amount is hedged.