Hedging Strategies in Commodity Markets – Rolling Intrinsic and Delta Hedging for Virtual Power Plants

Richard Biegler-König

Applied Mathematical Finance, 2020, vol. 27, issue 6, 550-582

Abstract: Hedging on commodity markets is usually done by applying either the rolling intrinsic strategy or the canonical delta hedge strategy. In this paper we introduce, compare and discuss both hedging strategies in the context of virtual power plants (VPP). We formulate the precise relationship of the two strategies mathematically. Our main result is that they are not only very similar regarding hedge construction but also that both strategies are equal in expectation. The proof involves some stochastic calculus and the Brownian local time. We illustrate our findings with simulated data as well as in prototypical market scenarios. These studies show that the rolling intrinsic hedge comes with a riskier profile than the delta hedge.

Date: 2020
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/1350486X.2021.1898998 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:apmtfi:v:27:y:2020:i:6:p:550-582

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAMF20

DOI: 10.1080/1350486X.2021.1898998

Access Statistics for this article

Applied Mathematical Finance is currently edited by Professor Ben Hambly and Christoph Reisinger

More articles in Applied Mathematical Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().