Hedging Exposure to Electricity Price Risk in a Value at Risk Framework
Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)
Tilburg University - Center for Economic Research, Econometrics and Finance Group; TiasNimbas Business School
affiliation not provided to SSRN
February 21, 2007
ERIM Report Series Reference No. ERS-2007-013-F&A
This paper deals with the question how an electricity end-consumer or distribution company should structure its portfolio with energy forward contracts. This paper introduces a one period framework to determine optimal positions in peak and off-peak contracts in order to purchase future consumption volume. In this framework, the end-consumer or distribution company is assumed to minimize expected costs of purchasing respecting an ex-ante risk limit defined in terms of Value at Risk. Based on prices from the German EEX market, it is shown that a risk-loving agent is able to obtain lower expected costs than for a risk-averse agent.
Number of Pages in PDF File: 17
Keywords: Electricity prices, Forward risk premium, Hedge ratios, Mean variance
Date posted: March 7, 2007
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