Volume 3 — Valuation and Risk Metrics © Copyright 2002, CCRO. All rights reserved. 36 APPENDIX B – ASSET VALUATION FRAMEWORK The focus of this appendix is on valuation and risk measurement in market years. Valuation Steps Economic Life Valuation and Risk Metrics Stress Tests Market Years Non-market Years Active, liquid markets exist Dynamic and active hedging is possible Time beyond market years until the end of economic life Market Years Non-market Years Mark-to-market (MTM) combined with gross operating margins at risk applied over suitable holding periods Value beyond the market year using fundamental factors employing planning models using structural and systemic inputs (not liquidation value) Risk analysis to examine the sensitivity of the value of the assets to user-defined changes to inputs Economic Life Valuation and Risk Metrics Stress Tests Market Years Non - market Years Active, liquid markets exist Dynamic and active hedging is possible Time beyond market years until the end of economic life Market Years Non - market Years Mark - to - market (MTM) combined with gross operating margins at risk applied over suitable holding periods Value beyond the market year using fundamental factors employing planning models using structural and systemic inputs (not liquidation value) Risk analysis to examine the sensitivity of the value of the assets to user - defined changes to inputs Market Year Definition Definition for Portfolio Identify Positions Report: Value Report: Changes in Value Volumetric Exposures Operating Margin at Risk Stress Tests 1 2 3 4 5 6 7 8 1. Market year definition — Define “market years” and “non-market years” intervals for each asset and for commodities involved with that particular asset. 2. Market year definition for the portfolio — Define “market years” interval for the entire asset portfolio as the minimum of all the market years obtained in Step 1. 3. Identify positions — Identify asset, hedge, and other positions. 4. Report value — Report the MTM values for market years on assets and hedges. 5. Report changes in value — Report daily (or as needed) the change in the fair or MTM value of each component of the portfolio, subportfolio, and the total portfolio itself. 6. Volumetric exposures — Develop volumetric exposures. 7. Gross operating margins at risk — Report metric by commodity, location, asset, and tenor. 8. Stress tests — Risk analysis to examine the sensitivity of the value of the assets to user-defined changes to inputs.