Cross hedging and value at risk: Wholesale electricity forward contracts

Chi Keung WOO, Ira HOROWITZ, Khoa HOANG

Research output: Chapter in Book/Report/Conference proceedingChapters

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 languageEnglish
Title of host publicationAdvances in investment analysis and portfolio management
EditorsCheng-Few LEE
Place of PublicationGreenwich, Conn.
PublisherJAI Press Inc.
Pages283-301
Volume8
ISBN (Electronic)9780080543970
ISBN (Print)0080543979, 9780080543970, 0762307986
Publication statusPublished - Sep 2001

Citation

Woo, C., Horowitz, I., & Hoang, K. (2001). Cross hedging and value at risk: Wholesale electricity forward contracts. In C.-F. Lee (Ed.), Advances in investment analysis and portfolio management (Vol. 8, pp. 283-301). Greenwich, Conn.: JAI Press Inc.

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