Evaluation of static hedging strategies for hydropower producers in the Nordic market
AbstractIn 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 InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 27133.
Date of creation: Dec 2010
Date of revision:
Publication status: Forthcoming in Journal of Energy Markets 4.3(2010): pp. 1-28
Risk management; Static hedging; Hydropower producers; Nordic electricity market; Risk premium;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-12-18 (All new papers)
- NEP-ENE-2010-12-18 (Energy Economics)
- NEP-RMG-2010-12-18 (Risk Management)
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.:
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