Download this Paper Open PDF in Browser

Static Mitigation of Volumetric Risk

45 Pages Posted: 13 Nov 2015  

Rachid Id Brik

ESSEC Business School

Andrea Roncoroni

ESSEC Business School

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 2014

Abstract

We consider the problem of designing a financial instrument aimed at mitigating the joint exposure to random price and volume delivery fluctuations of energy-linked commitments. We formulate a functional optimization problem over a set of regular pay-off functions: one is written on energy price, while the other is issued over any index exhibiting statistical correlation to volumetric load. On a theoretical ground, we derive closed-form expressions for both pay-off structures under suitable conditions about the statistical properties of the underlying variables; we pursue analytical computations in the context of a lognormal market model, and deliver explicit formulae for the optimal derivative instruments. On a practical ground, we first develop a comparative analysis of model output through simulation experiments; next, we perform an empirical study based on data quoted at EPEX SPOT power market. Our results suggest that combined price-volume hedging performance improves along with an increase of the correlation between load and index values. This outcome paves the way to a new class of effective strategies for managing volumetric risk upon extreme temperature waves.

Keywords: Volumetric Risk, Energy Risk, Corporate Financial Risk Management, Contract Design, Derivatives

JEL Classification: C31, E43, G11

Suggested Citation

Id Brik, Rachid and Roncoroni, Andrea, Static Mitigation of Volumetric Risk (September 1, 2014). Available at SSRN: https://ssrn.com/abstract=2689112 or http://dx.doi.org/10.2139/ssrn.2689112

Rachid Id Brik

ESSEC Business School ( email )

3 Avenue Bernard Hirsch
CS 50105 CERGY
CERGY, CERGY PONTOISE CEDEX 95021
France

Andrea Roncoroni (Contact Author)

ESSEC Business School ( email )

Avenue Bernard Hirsch BP 50105
Cergy-Pontoise, 95021
France
+33 (0)1 34 43 32 39 (Phone)
+33 (0)1 34 43 30 01 (Fax)

HOME PAGE: http://www45.essec.edu/faculty/andrea-roncoroni

Paper statistics

Downloads
60
Rank
308,329
Abstract Views
356