Dr. Ronn is a professor of Finance at the McCombs School of Business,
In addition to his academic work, Dr. Ronn provides executive education, consulting and litigation-support services in the area of energy finance. He has also worked for Merrill Lynch & Co. and Morgan Stanley. His consulting activities in energy have focused on the oil, natural gas, and power industries, and have dealt with asset valuation and risk management, including optimal hedging policies. In November 2004, Dr. Ronn was selected by Energy Risk to the “Energy Risk Hall of Fame.”
In what areas of finance do you specialize?
My academic interests and consulting services have been primarily focused in the areas of interest rate, financial risk
What steps should companies be taking to manage commodity price risk?
Many companies exposed to energy-price risk use reasonable “rules of thumb” to manage that exposure. In my view, the most important step companies should take is to formalize their objective function – that is, what is it they are trying to optimize? Once companies have specified an objective function, its optimization guarantees they are doing the best they can. While incorporating the quantity uncertainty to which companies are subject, what I have done in my hedging consulting work is to make explicit the trade-off between risk and return. As we know from its analogous application in investment management, such a trade-off gives rise to a range of optimal solutions: For any given level of risk, we can seek the highest expected rate of return.
What lessons would you say you have learned from working in
industry and in academia?
In terms of my academic research, I have learned of the importance of conducting applied research. That is, whereas the research should be grounded in solid theory, it should also have an application to corporate decisions in the “real world.” Another important lesson is the ability to learn from markets in terms of the message they are attempting to convey. Once we have understood this “message from markets,” the challenge is to use it to make optimal business decisions, including hedging decisions. Finally, in my consulting work I have seen the importance of “modeling” the issue at hand – that is, specifying a situation in terms of analytics – as that permits us to make optimal decisions.
What is it that makes energy finance unique relative to other areas of finance?
While many of the tools we use in other areas of finance can be applied to energy finance as well, energy finance has a physicality to it compared to other areas of finance. While a Treasury Bill has the same value everywhere (since it can be costlessly transported), a barrel of oil in one location can differ in price from its value in another location. This has important implications for the analytics we bring to bear on valuation and risk management.
What do you like most about teaching at UT’s McCombs School of Business?
It is a tremendous learning experience to work with intelligent and motivated students and faculty colleagues at a world-class teaching and research institute. The ability to conduct academic research permits us to convey its relevance,