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What is volume risk?

Volume risk

This is the risk arising from changes in volume to the supply or consumption of a commodity, which often causes volatility. Prices tend to move at more extreme levels in commodity markets during volatile trading conditions than they do with other asset classes such as stocks.

Where have you heard about volume risk?

It’s often used in the context of oil and energy investments. The weather is one factor that can cause large deviations from a volume forecast as temperature changes can affect how much energy people consume.

What you need to know about volume risk.

Volume risk is hard to manage in a retail energy business, so the challenge is to come up with an adjustment model that can accurately predict it. For example, a gas supplier has a general idea of when fuel will be most in demand by households, but they have to allow for swings caused by the weather.

Historical volume risk is the measure of market variance in the past, while implied volume risk is the perception of what it will be in the future.

Find out more about volume risk.

Read our definition of volatility risk for another way to determine investment risk.

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