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: | Oum Yumi, Oren Shmuel, Deng Shijie |
Keywords: | finance & banking |
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.