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Evaluation of Different Hedging Strategies for Commodity Price Risks of Industrial Cogeneration Plants

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Abstract

In this paper, we design and evaluate eight different strategies for hedging commodity price risks of industrial cogeneration plants. Price developments are parameterized based on EEX data from 2008-2011. The probability distributions derived are used to determine the value-at-risk (VaR) of the individual strategies, which are in a final step combined in a mean-variance portfolio analysis for determining the most efficient hedging strategy. We find that the strate-gy adopted can have a marked influence on the remaining price risk. Quarter futures are found to be particularly well suited for reducing market price risk. In contrast, spot trading of CO2 certificates is found to be preferable compared to forward market trading. Finally, portfolio optimization shows that a mix of various hedging strategies can further improve the profita-bility of a heat-based cogeneration plant.

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Paper provided by E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) in its series FCN Working Papers with number 2/2012.

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Length: 39 pages
Date of creation: Mar 2012
Date of revision: Mar 2013
Handle: RePEc:ris:fcnwpa:2012_002
Contact details of provider: Web page: http://www.eonerc.rwth-aachen.de/fcn
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Keywords: Commodity price risk; Cogeneration; Hedging; mean-variance portfolio optimization;

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Find related papers by JEL classification:
  • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
  • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
  • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
  • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
  • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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Cited by:

  1. Dergiades, Theologos & Madlener, Reinhard & Christofidou, Georgia, 2012. "The Nexus between Natural Gas Spot and Futures Prices at NYMEX: Do Weather Shocks and Non-Linear Causality in Low Frequencies Matter?," FCN Working Papers 17/2012, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN), revised Sep 2013.
  2. Rohlfs, Wilko & Madlener, Reinhard, 2011. "Multi-Commodity Real Options Analysis of Power Plant Investments: Discounting Endogenous Risk Structures," FCN Working Papers 22/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  3. Kavvadias, K.C., 2016. "Energy price spread as a driving force for combined generation investments: A view on Europe," Energy, Elsevier, vol. 115(P3), pages 1632-1639.

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