Hedging Exposure to Electricity Price Risk in a Value at Risk Framework

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Hedging Exposure to Electricity Price Risk in a Value at Risk Framework

Author Info

Huisman, R.
Mahieu, R.J.
Schlichter, F. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)

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Abstract

This paper deals with the question how an electricity end-consumer or distribution company should structure its portfolio with energy forward contracts. This paper introduces a one period framework to determine optimal positions in peak and off-peak contracts in order to purchase future consumption volume. In this framework, the end-consumer or distribution company is assumed to minimize expected costs of purchasing respecting an ex-ante risk limit defined in terms of Value at Risk. Based on prices from the German EEX market, it is shown that a risk-loving agent is able to obtain lower expected costs than for a risk-averse agent.

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Publisher Info
Paper provided by Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam. in its series Research Paper with number ERS-2007-013-F&A Revision_Date: 2009-07-29.

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Date of creation: 21 Feb 2007
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Handle: RePEc:dgr:eureri:30009941

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This paper has been announced in the following NEP Reports:

NEP-ALL-2007-03-17 (All new papers)
NEP-ENE-2007-03-17 (Energy Economics)
NEP-FMK-2007-03-17 (Financial Markets)
NEP-RMG-2007-03-17 (Risk Management)
NEP-UPT-2007-03-17 (Utility Models & Prospect Theory)

References listed on IDEAS
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.:

Huisman, Ronald & Huurman, Christian & Mahieu, Ronald, 2007. "Hourly electricity prices in day-ahead markets," Energy Economics, Elsevier, vol. 29(2), pages 240-248, March. [Downloadable!] (restricted)
Other versions:
- Huisman, R. & Huurman, C. & Mahieu, R.J., 2007. "Hourly Electricity Prices in Day-Ahead Markets," Research Paper ERS-2007-002-F&A Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
Campbell, Rachel & Huisman, Ronald & Koedijk, Kees, 2001. "Optimal portfolio selection in a Value-at-Risk framework," Journal of Banking & Finance, Elsevier, vol. 25(9), pages 1789-1804, September. [Downloadable!] (restricted)
William F. Sharpe, 1965. "Mutual Fund Performance," Journal of Business, University of Chicago Press, vol. 39, pages 119. [Downloadable!]

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