Financial Engineering Harvard Case Solution & Analysis

Financial Engineering Case Study Solution

Financial Engineering

Enron created many sort of products based around natural gas and called it EnFolio Gas Bank. The production and supply became highly customized as various customers demanded various forms of prices, while investors looked for a stabilized return on income. The gas industry proved to be highly volatile with four times greater the risk of oil sector. To bridge the gap between buyers and sellers, Enron worked out several solutions based on the prevailing market conditions like:

  • Fixed Volume at Fixed Prices

Gas is a natural resource, which has to be used as a sustainable energy in future, so control over such natural resource is essential. In order to address the need of natural gas as fuel source, a significant amount of various governments and authorities have set out to control the prices according to the market forces. The main reason for this can be said to be controlling the market forces.

In order to prevent the natural resources from becoming a part of private competition, the various authorities controlled prices to deter emergence of private companies in this field. However, despite the control over prices, private companies did show interest in venturing into the field. This was because of profitable returns in long run from riskier investments in the field and highly volatile nature of the industry itself.

Financial Engineering Harvard Case Solution & Analysis

Oil was considered highly profitable development in hands of private investors but it would result in high discrepancies occurring throughout the world with control over resource fields and rise of monopolistic pricing depriving the usage of resources for production. This led to monitoring of natural resources at fixed prices, so that everyone can benefit.

  • Volume to Natural Gas Price Index

Enron is able to differentiate its product supply through the service it provides in relation to that product, instead of altering the nature of the product itself. This is an effective strategy to increase its investor and consumer base. However, the drawback it faces is in the form of government rules and regulations. Being a multinational company, Enron operates in many countries, which means that it is subjected to various forms of regulations and pricing policies.

Enron’s main focus is to bridge the pricing gap by usage of derivatives to gain advantage over competitors and to react according to the trends. The derivatives will help the manager in outlining the areas where there is a high risk and to create personalized derivatives, which deal with those risks. Where Standard and Poor (S&P) index states the gas field to be riskier than oil sector, the main reason behind was highlighted to be highly fluctuating prices. The main agenda, which is to find a spot price that is the price, which is acceptable in highly volatile pricing environment, can help Enron in gaining more markets by offering a single price while hedging the risk of the price fluctuations themselves.


Financial Engineering Harvard Case Solution & Analysis


  • Capped at Determined Level

In their bid to gain a spot price while absorbing the risk of fluctuating prices is highly technical and risky for any sort of company. Given the volatile nature of the industry in which Enron is operating, the main focus should be on using the derivatives on personalized situations to mitigate the business risk up to a significant level. This means that a capped level is more or less functioning like spot price. The capped value is determined by the government regulatory bodies to ensure that a negative impact of trade is minimized. The spot value on the other hand focuses on one price, which is feasible to all related parties involved in the transaction, including customers, investors and suppliers.

Tennessee Valley Authority

  • Overall Capacity of the Plants

In determining the main problem of Tennessee Valley Authority (TVA) stems from unprecedented growth in demand for power. This puts a strain on the existing power plants to generate more power supply. With diminishing support from the government, the TVA will have to go towards the alternative means to generate power supply and maintain profitability. The large financial structure created for building of large plants and power units have a great flaw that a trip in one part would crumble the whole structure.

The current focus of TVA is on increasing the power units to meet the demand, without increasing the cost with high level of debt. The decision pertaining to purchasing options of other companies to buy power units can be feasible but if properly handled after hedging the risk of cost associated with these options....................

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