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

Fleten, Stein-Erik; Bråthen, Espen; Nissen-Meyer, Sigurd-Erik
Journal article, Peer reviewed
Published version
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URI
http://hdl.handle.net/11250/2461152
Date
2010
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  • Institutt for industriell økonomi og teknologiledelse [1938]
  • Publikasjoner fra CRIStin - NTNU [20948]
Original version
Journal of Energy Markets. 2010, 3 (4), 1-28.  
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 the 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.
Publisher
Incisive Media
Journal
Journal of Energy Markets

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