Evaluation of static hedging strategies for hydropower producers in the Nordic market

Stein-Erik Fleten, Espen Bråthen and Sigurd-Erik Nissen-Meyer

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper we develop an optimization model to derive static hedge positions for hydropower producers with different risk characteristics. Previous research has primarily considered dynamic hedging; however, static hedging is the common choice among hydropower producers because of its simplicity. Our contribution is to evaluate such hedging out of sample. The hedging strategies we analyze include a natural hedge, which means no hedging, and output from an optimization model that we develop ourselves. The results show that, although optimized positions vary over time, hedging with use of forward contracts significantly reduces the risk in terms of value-at-risk, conditional value-at-risk and standard deviation of the revenue. Furthermore, this improvement results in only a minor reduction in mean revenue.

Keywords: Risk management; Static hedging; Hydropower producers; Nordic electricity market; Risk premium (search for similar items in EconPapers)
JEL-codes: D81 G32 Q4 (search for similar items in EconPapers)
Date: 2010-12
New Economics Papers: this item is included in nep-ene and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Forthcoming in Journal of Energy Markets 4.3(2010): pp. 1-28

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