REGULATION, COMPLIANCE AND GOVERNANCE Essay Example | Topics and Well Written Essays - 2000 words

REGULATION, COMPLIANCE AND GOVERNANCE - Essay Example When the derivatives were distributed, it created an opportunity of basic training and helped in exploiting the difference in prices in future and spot markets. The gas trading of Enron had allowed it to be a market maker and acted as counterparty by trading on both sides and made profits as spreads between the offer and the bid price. Enron was under residual risk after it accessed both the markets and was able to overcome the same by entering into swaps and other such arrangements with dealers. As Enron owned physical plants and took charge of operating those, it had a comparative advantage over the competitors. The company was also able to protect itself from the market price movements for the same reason. Being an industry insider, it also had advantages of acquiring information needed for forecasting shocks related to particular region or sector. Therefore, besides being a market maker, Enron was also a creator of new products. The business strategy used by Enron, in 1990s, was asset light and vertical integration, after it became too leveraged due to the merger. The asset light approach indicates combination of the development of sophisticated risk management techniques with the least amount of ownership and operation of plants. Virtual integration system helps to maintain the reliability of a product with less capital investment. Enron took advantages of deregulation of the US energy markets, as later on, it can be noticed that they enjoyed the experience of steadily rising profit from merger of two utility based companies. Additionally, besides owning several gas pipelines, it also ran a natural gas as well as electricity transmission business. After 1985, Enron even started trading in gas and offered various types of derivates to interested customers, when the gas pipelines business met an end. When the derivatives