Correlation - The energy price factor
Navneet Arora provides empirical evidence that significant correlations exist between the movements of commodity prices and the credit quality of firms in the energy sector
With the defaults of Enron, PG&E and, more recently, Calpine Corporation, credit risk has acquired prominence among energy risk professionals. It is important for risk professionals to understand the nature of credit risk and how it relates to other risks inherent in a trade in order to be able to charge for it appropriately.
The charge for credit risk means that the trader has eliminated the credit risk associated with his portfolio and this risk is now held by some other portion of the
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