Hedging Expected Losses on Derivatives in Electricity Futures Markets
AbstractWe investigate the problem of pricing and hedging derivatives of Electricity Futures contract when the underlying asset is not available. We propose to use a cross hedging strategy based on the Futures contract covering the larger delivery period. A quick overview of market data shows a basis risk for this market incompleteness. For that purpose we formulate the pricing problem in a stochastic target form along the lines of Bouchard and al. (2008), with a moment loss function. Following the same techniques as in the latter, we avoid to demonstrate the uniqueness of the value function by comparison arguments and explore convex duality methods to provide a semi-explicit solution to the problem. We then propose numerical results to support the new hedging strategy and compare our method to the Black-Scholes naive approach.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1401.8271.
Date of creation: Jan 2014
Date of revision:
Contact details of provider:
Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-02-08 (All new papers)
- NEP-ENE-2014-02-08 (Energy Economics)
- NEP-FMK-2014-02-08 (Financial Markets)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hans FÃllmer & Peter Leukert, 1999. "Quantile hedging," Finance and Stochastics, Springer, vol. 3(3), pages 251-273.
- Benth, Fred Espen & Koekebakker, Steen, 2008. "Stochastic modeling of financial electricity contracts," Energy Economics, Elsevier, vol. 30(3), pages 1116-1157, May.
- Hans FÃllmer & Peter Leukert, 2000. "Efficient hedging: Cost versus shortfall risk," Finance and Stochastics, Springer, vol. 4(2), pages 117-146.
- Föllmer Hans & Penner Irina, 2006. "Convex risk measures and the dynamics of their penalty functions," Statistics & Risk Modeling, De Gruyter, vol. 24(1/2006), pages 36, July.
- Mark Broadie & Paul Glasserman, 1996. "Estimating Security Price Derivatives Using Simulation," Management Science, INFORMS, vol. 42(2), pages 269-285, February.
- Ludovic Moreau, 2011. "Stochastic target problems with controlled loss in jump diffusion models," Post-Print hal-00515522, HAL.
- Lindell, Andreas & Raab, Mikael, 2009. "Strips of hourly power options--Approximate hedging using average-based forward contracts," Energy Economics, Elsevier, vol. 31(3), pages 348-355, May.
- Bruno Bouchard & Marcel Nutz, 2011. "Weak Dynamic Programming for Generalized State Constraints," Papers 1105.0745, arXiv.org, revised Oct 2012.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.