Shape risk in

finance Finance refers to monetary resources and to the study and Academic discipline, discipline of money, currency, assets and Liability (financial accounting), liabilities. As a subject of study, is a field of Business administration, Business Admin ...

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 the ...

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 hol ...

with standard hedging products having a lower

granularity Granularity (also called graininess) is the degree to which a material or system is composed of distinguishable pieces, "granules" or "grains" (metaphorically). It can either refer to the extent to which a larger entity is subdivided, or the ...

. 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. 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 Financial risk is any of various types of risk associated with financing, including financial transactions that include company loans in risk of default. Often it is understood to include only downside risk, meaning the potential for financi ...

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 Coll ...

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

References

Market risk Commodities {{finance-stub