Welcome to this module on Stress

Risk Metrics and Definitions
Stress

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Objectives

This module enables you to answer key questions about Stress:

  • What is Stress?
  • Why is Stress an important risk metric?
  • How is Stress relevant at Cargill?
  • What are the strengths and weaknesses of Stress?
  • How do Stress insights support trading and risk performance?
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Stress and Its Importance

Let’s begin.
Click on each icon to learn more.

What is Stress?

  • Stress is an essential part of Cargill's Risk Metric System.
  • It provides a forward looking and subjective estimation of market loss potential.
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Why does Stress Matter?

  • It provides insight into potential losses.
  • It uses subjective, qualitative, and forward-looking inputs.
  • It improves transparency on risk deployed.
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How is Stress Used at Cargill?

  • It aligns risk appetite with earnings expectations
  • It influences position management to capture opportunities
  • It supports governance through a formal limit framework
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Cargill’s Market Risk Framework

Watch this video to learn about Cargill's Market Risk Framework and the importance of Stress.

Types of Stress

There are two main types of Stress.

Select each type of stress to learn about it.

  • Correlated Stress is a forward looking and subjective estimate of market loss potential.

    • May include offsets and correlations
    • Potential loss under severe but plausible scenario
    • Correlation becomes a risk factor and is stressed as well, assuming a severe but plausible behavior between market factors

    Note: There are times when a correlated stress scenario will not include offsets or diversifications.

  • Additive Stress is a forward looking and subjective estimate of market loss potential.

    • Excludes offsets and is additive in nature
    • Potential loss under extreme tail event scenario
    • Portfolio components are stressed independently and then summed with no benefit to correlation given

Examples of Stress

Let's look at an example for each type of Stress.
Overall, our assumption for this example is that the business is long WHEAT 100kmt and we are short CORN 100kmt.

Hover over each tile to view the examples.

With additive stress, we stress WHEAT down $5/mt, generating a stress of $5mm, and we stress CORN up $5/mt, generating a stress of $5mm. We sum both, giving an additive stress for this book of $10mm.

Examples of Additive Stress

For correlated stress, we will assume that even in severe cases WHEAT and CORN remain linked to each other, and a strong down move on WHEAT will limit the upside on CORN. As a result, we may stress $5/mt down on WHEAT but only $1/mt up on CORN, resulting in a Correlated Stress of $6mm.

The diversification benefit here is $4mm, which is the difference between Additive and Correlated Stress.

Examples of Correlated Stress

Strengths and Weaknesses of Stress

Hover over each icon to learn the strengths and weaknesses of Stress.

  • Allows businesses to appropriately size their positions
  • Helps optimize risk deployment to achieve earnings goals
  • Not dependent on past events and quality of data
  • Provides a subjective, forward looking and qualitative view of risks
  • Supports governance and allocation of risk
  • Adds discipline to the budgeting process

Strengths

  • Stress is a subjective risk metric
  • Requires a deep understanding of markets
  • Involves designing complex scenarios that consider many risk factors
  • Lacks standardization for estimating “severe” or “extreme” scenarios
  • Difficult to compare across businesses

Weaknesses

Stress Effectiveness

How do we know it’s working?

Unlike statistical metrics, Stress is a discretionary and forward-looking measure that is more severe and not reached frequently.

As a result, most businesses compare stress levels to extreme P/L days or when they reach P/L Flags to evaluate their calibration.

Select the Example button to learn more.

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Application of Correlated Stress

Here’s a scenario that helps illustrate the application of Correlated Stress.

Hover over the characters to learn more.

Andrea is grain trader. She currently holds a long wheat position of 1,000kmt, and has a Correlated Stress limit of $20mm.

Andrea sees a great trading opportunity in the coming days and wants to understand the risk she currently holds and evaluate if she has room to trade a bigger position.

Andrea knows that she needs to manage her position sizing to be within limits, at all times, or request a limit extension in advance to ensure she doesn’t breach her limit.

She decides to talk to her risk manager about the current stress assessment.

Andrea

The risk manager explains that stress has been calibrated down $5/mt.

When we apply that unit move to the exposure the business' correlated stress then becomes: $5mm.

We compare that Correlated Stress level to the Stress limit, to validate that we are within the Stress limits.

In this case, $5mm is less than $20mm. So the risk manager confirms to Andrea that she is within limits, and still has room to deploy more risk against the foreseen trading opportunity.

If the Correlated Stress level is very close to limits and the business wants to exceed it, they can request a limit extension to the CRC.

Miguel

Conclusion

Now that you have completed this module, you should be able to answer the following questions about Stress:

  • What is Stress?
  • Why is Stress an important risk metric?
  • How is Stress relevant at Cargill?
  • What are the strengths and weaknesses of Stress?
  • How do Stress insights support trading and risk performance?
  • Use this module as a reference in the future as needed.
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