Hedging quantity risks with standard power options in a competitive wholesale electricity market

Yumi Oum, Shmuel Oren and Shijie Deng

Naval Research Logistics (NRL), 2006, vol. 53, issue 7, 697-712

Abstract: This paper addresses quantity risk in the electricity market and explores several ways of managing such risk. The paper also addresses the hedging problem of a load‐serving entity, which provides electricity service at a regulated price in electricity markets with price and quantity risk. Exploiting the correlation between consumption volume and spot price of electricity, an optimal zero‐cost hedging function characterized by payoff as a function of spot price is derived. It is then illustrated how such a hedging strategy can be implemented through a portfolio of forward contracts and call and put options. © 2006 Wiley Periodicals, Inc. Naval Research Logistics 2006

Date: 2006
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https://doi.org/10.1002/nav.20184

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Persistent link: https://EconPapers.repec.org/RePEc:wly:navres:v:53:y:2006:i:7:p:697-712

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