Hedging Exposure to Electricity Price Risk in a Value at Risk Framework
2007-02-21
Research Paper
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Published by
Rotterdam School of Management (RSM) Erasmus University, Erasmus Research Institute of Management (ERIM)
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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
Classifications using
Journal of Economic Literature (JEL) Classification System
- G3 : Corporate Finance and Governance
- M : Business Administration and Business Economics; Marketing; Accounting
- G13 : Contingent Pricing; Futures Pricing
Automatically Extracted Terms
- off-peak
- price
- contract
- market
- electricity
- peak hour
- off-peak hour
- day-ahead
- level
- position
- day-ahead market
- volume
- consumer
- german eex market
- delivery
- day t
- consumption
- value
- portfolio
- peak hours
