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Hedging Exposure to Electricity Price Risk in a Value at Risk FrameworkRonald HuismanErasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) Ronald MahieuTilburg University - Center for Economic Research, Econometrics and Finance Group; Eindhoven University of Technology (TUE) - Department of Industrial Engineering and Innovation Sciences F. Schlichteraffiliation not provided to SSRN 21 2007 2, ERIM Report Series Reference No. ERS-2007-013-F&A Abstract: 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, Mean variance, Hedge ratios, Forward risk premium JEL Classification: M, G3, G13 working papers seriesDate posted: March 7, 2007Suggested CitationContact Information
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