Strips of hourly power options - Approximate hedging using average-based forward contracts
2009 (English)In: Energy Economics, ISSN 0140-9883, E-ISSN 1873-6181, Vol. 31, no 3, 348-355 p.Article in journal (Refereed) Published
We study approximate hedging strategies for a contingent claim consisting of a strip of independent hourly power options. The payoff of the contingent claim is a sum of the contributing hourly payoffs. As there is no forward market for specific hours, the fundamental problem is to find a reasonable hedge using exchange-traded forward contracts, e.g. average-based monthly contracts. The main result is a simple dynamic hedging strategy that reduces a significant part of the variance. The idea is to decompose the contingent claim into mathematically tractable components and to use empirical estimations to derive hedging deltas. Two benefits of the method are that the technique easily extends to more complex power derivatives and that only a few parameters need to be estimated. The hedging strategy based on the decomposition technique is compared with dynamic delta hedging strategies based on local minimum variance hedging, using a correlated traded asset.
Place, publisher, year, edition, pages
2009. Vol. 31, no 3, 348-355 p.
Hedging; Power option; Black76; Swing option; Local minimum variance hedging
IdentifiersURN: urn:nbn:se:su:diva-25781DOI: 10.1016/j.eneco.2008.11.010ISI: 000265478500003OAI: oai:DiVA.org:su-25781DiVA: diva2:200508
Part of urn:nbn:se:su:diva-85702009-03-122009-02-192010-07-19Bibliographically approved