Hedging quantity risks with standard power options in a competitive wholesale electricity market

Hedging quantity risks with standard power options in a competitive wholesale electricity market

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Article ID: iaor20072950
Country: United States
Volume: 53
Issue: 7
Start Page Number: 697
End Page Number: 712
Publication Date: Oct 2006
Journal: Naval Research Logistics
Authors: , ,
Keywords: finance & banking
Abstract:

This paper addresses quantity risk in the electricity market and explores several ways of managing such risk. The paper also addresses the hedging problem of a load-serving entity, which provides electricity service at a regulated price in electricity markets with price and quantity risk. Exploiting the correlation between consumption volume and spot price of electricity, an optimal zero-cost hedging function characterized by payoff as a function of spot price is derived. It is then illustrated how such a hedging strategy can be implemented through a portfolio of forward contracts and call and put options.

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