Hedging Exposure to Electricity Price Risk in a Value at Risk Framework
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.
|Keywords||Electricity prices, Forward risk premium, Hedge ratios, Mean variance|
|JEL||Contingent Pricing; Futures Pricing (jel G13), Corporate Finance and Governance (jel G3), Business Administration and Business Economics; Marketing; Accounting (jel M)|
|Publisher||Erasmus Research Institute of Management|
|Series||ERIM Report Series Research in Management|
|Journal||ERIM report series research in management Erasmus Research Institute of Management|
Huisman, R, Mahieu, R.J, & Schlichter, F. (2007). Hedging Exposure to Electricity Price Risk in a Value at Risk Framework (No. ERS-2007-013-F&A). ERIM report series research in management Erasmus Research Institute of Management. Erasmus Research Institute of Management. Retrieved from http://hdl.handle.net/1765/8995