Cross-hedging and forward-contract pricing of electricity in the Pacific Northwest

Chi Keung WOO, Ira HOROWITZ, Arne OLSON, Andrew DEBENEDICTIS, David MILLER, Jack MOORE

Research output: Contribution to journalArticle

11 Citations (Scopus)

Abstract

This paper develops a linear regression model for using actively traded NYMEX natural gas futures as a cross-hedge against electricity spot-price risk in the Pacific Northwest and for pricing the forward contracts in the presence of temperature and hydro risks. Our approach comports with reality and provides power purchasers with an effective instrument through which they can hedge their electricity bets through natural gas futures. It also demonstrates the sharp month-to-month variations in the natural gas futures' optimal hedge ratios and hedge effectiveness. Finally, it finds significant risk premiums in the Pacific Northwest forward prices, supporting the hypothesis that forward-contract buyers are relatively more risk-averse than sellers. Copyright © 2011 John Wiley & Sons, Ltd.
Original languageEnglish
Pages (from-to)265-279
JournalManagerial and Decision Economics
Volume32
Issue number4
DOIs
Publication statusPublished - Jun 2011

Fingerprint

Electricity
Natural gas
Costs
Linear regression
Pricing
Hedge
Forward contracts
Cross-hedging
Temperature
Seller
Risk premium
Forward price
Risk-averse
Linear regression model
Price risk
Buyers
Spot price
Optimal hedge ratio

Citation

Woo, C.-K., Horowitz, I., Olson, A., DeBenedictis, A., Miller, D., & Moore, J. (2011). Cross-hedging and forward-contract pricing of electricity in the Pacific Northwest. Managerial and Decision Economics, 32(4), 265-279. doi: 10.1002/mde.1533