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Analysis of the financial margins required to hedge risks in electric power futures markets

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Listed:
  • Javier Pantoja-Robayo
  • Kelly Maradey Angarita
  • Alfredo Trespalacios Carrasquilla

Abstract

One of the strengths of futures markets is the elimination of counterparty risk, but to accomplish this, it is important to consider the financial guarantees the clearing house requires from market participants. These margins must hedge the risk related to extreme variations in the product price, but they should not be excessive to avoid limiting the number of participants in the market. In this paper we propose a new methodology to provide appropriate margins in the electric power futures market, and we present an application for the Colombian market. We conduct a Monte Carlo simulation to assess the daily changes of the futures price and estimate measures of risk for different scenarios for “El Nino” weather conditions, holding periods, and expiration times. We find that the new methodology substantially modifies required financial guarantee levels compared to the methodology currently used to calculate margins.

Suggested Citation

  • Javier Pantoja-Robayo & Kelly Maradey Angarita & Alfredo Trespalacios Carrasquilla, 2017. "Analysis of the financial margins required to hedge risks in electric power futures markets," Revista Ecos de Economía, Universidad EAFIT, vol. 21(45), pages 68-107, December.
    • Handle: RePEc:col:000442:016193
    DOI: 10.17230/ecos.2017.45.4
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    References listed on IDEAS

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    1. Stoll, Hans R. & Whaley, Robert E., 1990. "The Dynamics of Stock Index and Stock Index Futures Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(4), pages 441-468, December.
    2. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    3. Gloria Stella Salazar Marín & Javier Pantoja, 2010. "Los precios forward sobre electricidad. ¿Determinados racionalmente por los agentes del mercado colombiano?," Revista Ad-Minister, Universidad EAFIT, December.
    4. Geman, Hélyette & Roncoroni, Andrea, 2003. "A Class of Marked Point Processes for Modelling Electricity Prices," ESSEC Working Papers DR 03004, ESSEC Research Center, ESSEC Business School.
    5. Javier Orlando Pantoja Robayo & Juan Fernando Rendón García & Alfredo Trespalacios Carrasquilla, 2012. "Estrategia de Cobertura a Través de Contratos Forward en Mercados Eléctricos," Documentos de Trabajo de Valor Público 10665, Universidad EAFIT.
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    Cited by:

    1. Sandra Giraldo & David la Rotta & César Nieto-Londoño & Rafael E. Vásquez & Ana Escudero-Atehortúa, 2021. "Digital Transformation of Energy Companies: A Colombian Case Study," Energies, MDPI, vol. 14(9), pages 1-14, April.

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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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