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Evaluation of static hedging strategies for hydropower producers in the Nordic market

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  • Fleten, Stein-Erik
  • Bråthen, Espen
  • Nissen-Meyer, Sigurd-Erik

Abstract

In this paper we develop an optimization model to derive static hedge positions for hydropower producers with different risk characteristics. Previous research has primarily considered dynamic hedging; however, static hedging is the common choice among hydropower producers because of its simplicity. Our contribution is to evaluate such hedging out of sample. The hedging strategies we analyze include a natural hedge, which means no hedging, and output from an optimization model that we develop ourselves. The results show that, although optimized positions vary over time, hedging with use of forward contracts significantly reduces the risk in terms of value-at-risk, conditional value-at-risk and standard deviation of the revenue. Furthermore, this improvement results in only a minor reduction in mean revenue.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 27133.

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Date of creation: Dec 2010
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Publication status: Forthcoming in Journal of Energy Markets 4.3(2010): pp. 1-28
Handle: RePEc:pra:mprapa:27133

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Related research

Keywords: Risk management; Static hedging; Hydropower producers; Nordic electricity market; Risk premium;

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  1. Bjerksund, Petter & Stensland, Gunnar & Vagstad, Frank, 2008. "Gas Storage Valuation: Price Modelling v. Optimization Methods," Discussion Papers 2008/20, Department of Business and Management Science, Norwegian School of Economics.
  2. Furió, Dolores & Meneu, Vicente, 2010. "Expectations and forward risk premium in the Spanish deregulated power market," Energy Policy, Elsevier, vol. 38(2), pages 784-793, February.
  3. Gregory W. Brown & Klaus Bjerre Toft, 2002. "How Firms Should Hedge," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1283-1324.
  4. Hendrik Bessembinder & Michael L. Lemmon, 2002. "Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets," Journal of Finance, American Finance Association, vol. 57(3), pages 1347-1382, 06.
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Cited by:
  1. Sanda, Gaute Egeland & Olsen, Eirik Tandberg & Fleten, Stein-Erik, 2013. "Selective hedging in hydro-based electricity companies," Energy Economics, Elsevier, vol. 40(C), pages 326-338.

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