Abstract
We consider the problem of an electric-power marketer offering a fixed-price forward contract to provide electricity purchased from a fledgling spot electricity market that is unpredictable and potentially volatile. Using a spot-price relationship between two wholesale electricity markets, we show how the marketer may hedge against the spot-price volatility, determine a forward price, assess the probability of making an ex post profit, compute the contract’s expected profit, and calculate the contract’s value at risk. Such information is useful to the marketer’s decision making. The empirical evidence from highly volatile spot-price data supports our contention that the spot-price relationship is not spurious and can be used for the purpose of risk hedging, pricing, and risk assessment. Copyright © 2001 by Elsevier Science Ltd.
| Original language | English |
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| Title of host publication | Advances in investment analysis and portfolio management |
| Editors | Cheng-Few LEE |
| Place of Publication | Greenwich, Conn. |
| Publisher | JAI Press Inc. |
| Pages | 283-301 |
| Volume | 8 |
| ISBN (Electronic) | 9780080543970 |
| ISBN (Print) | 0080543979, 9780080543970, 0762307986 |
| Publication status | Published - Sept 2001 |