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Hedging gas bills with weather derivatives

Author

Listed:
  • Karyl Leggio
  • Donald Lien

Abstract

Natural gas company managers concerned with customer satisfaction attempt to minimize the occurrence of extreme bills. Previously, only price fluctuations were addressed with derivative instruments; exchange-traded weather derivatives present a means of hedging exposure to increases in quantity of gas demanded during colder than expected winter months. We model a natural gas company’s ability to adjust for consumer sensitivity and exposure to extreme bills with the use of an optimal mix of weather derivatives and gas pricing derivatives. We find consumer exposure to extreme bills is minimized when the utility uses pricing and weather derivatives.(JEL G11, L51) Copyright Springer 2002

Suggested Citation

  • 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.
    • Handle: RePEc:spr:jecfin:v:26:y:2002:i:1:p:88-100
    DOI: 10.1007/BF02744454
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    References listed on IDEAS

    as
    1. Cao, M. & Wei, J., 1999. "Pricing Weather Derivative : An Equilibrium Approach," Rotman School of Management - Finance 99-002, Rotman School of Management, University of Toronto.
    2. 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.
    3. 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.
    4. Bawa, Vijay S., 1975. "Optimal rules for ordering uncertain prospects," Journal of Financial Economics, Elsevier, vol. 2(1), pages 95-121, March.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Joshua D. Woodard & Philip Garcia, 2008. "Basis risk and weather hedging effectiveness," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 68(1), pages 99-117, May.
    2. Eckhard Platen & Jason West, 2004. "A Fair Pricing Approach to Weather Derivatives," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 11(1), pages 23-53, March.
    3. Jane Ebinger & Walter Vergara, 2011. "Climate Impacts on Energy Systems : Key Issues for Energy Sector Adaptation," World Bank Publications - Books, The World Bank Group, number 2271, December.
    4. Mark Manfredo & Timothy Richards, 2009. "Hedging with weather derivatives: a role for options in reducing basis risk," Applied Financial Economics, Taylor & Francis Journals, vol. 19(2), pages 87-97.
    5. Turvey, Calum G. & Norton, Michael, 2008. "An Internet-Based Tool for Weather Risk Management," Agricultural and Resource Economics Review, Cambridge University Press, vol. 37(1), pages 63-78, April.
    6. Turvey, Calum G. & Weersink, Alfons, 2005. "Pricing Weather Insurance with a Random Strike Price: An Application to the Ontario Ice Wine Harvest," 2005 Annual meeting, July 24-27, Providence, RI 19255, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    7. Wolfgang Karl Hardle and Maria Osipenko, 2012. "Spatial Risk Premium on Weather Derivatives and Hedging Weather Exposure in Electricity," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    8. Ivana Štulec, 2017. "Effectiveness of Weather Derivatives as a Risk Management Tool in Food Retail: The Case of Croatia," IJFS, MDPI, vol. 5(1), pages 1-15, January.
    9. Tellez Gaytán, Jesús Cuauhtémoc & Serrano Acevedo, María Eugenia & Rico Arias, Jaime Ángel, 2014. "Modelación del clima bajo un proceso estocástico de reversión a la media estacional / Modeling weather under a seasonal mean reversion stochastic process," Estocástica: finanzas y riesgo, Departamento de Administración de la Universidad Autónoma Metropolitana Unidad Azcapotzalco, vol. 4(1), pages 9-32, enero-jun.
    10. Å tulec, Ivana & Petljak, Kristina & Naletina, Dora, 2019. "Weather impact on retail sales: How can weather derivatives help with adverse weather deviations?," Journal of Retailing and Consumer Services, Elsevier, vol. 49(C), pages 1-10.

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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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