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Derivative trading by utility firms

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  • Karyl Leggio
  • Donald Lien

Abstract

This paper examines the use of derivatives by a utility company. The hedging problem for utilities is atypical; the goal is not strictly to minimize average costs. Rather, the objectives are to minimize the upside risk associated with extreme bills, volatility of bills, and average expected bills for consumers. We characterize the optimal positions on futures contracts and options on futures that a utility company should assume. The results indicate that the use of derivatives (both futures and options on futures) is an efficient means of optimizing the objective functions without exposing consumers to speculative risk. Copyright Springer 2000

Suggested Citation

  • Karyl Leggio & Donald Lien, 2000. "Derivative trading by utility firms," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 24(1), pages 1-14, March.
    • Handle: RePEc:spr:jecfin:v:24:y:2000:i:1:p:1-14
    DOI: 10.1007/BF02759691
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    References listed on IDEAS

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    1. Fishburn, Peter C, 1977. "Mean-Risk Analysis with Risk Associated with Below-Target Returns," American Economic Review, American Economic Association, vol. 67(2), pages 116-126, March.
    2. Bawa, Vijay S., 1975. "Optimal rules for ordering uncertain prospects," Journal of Financial Economics, Elsevier, vol. 2(1), pages 95-121, March.
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    Cited by:

    1. Karyl Leggio & Donald Lien, 2002. "Hedging gas bills with weather derivatives," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 26(1), pages 88-100, March.

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