Static Mitigation of Volumetric Risk

40 Pages Posted: 14 Jun 2016

See all articles by Rachid Id Brik

Rachid Id Brik

ESSEC Business School

Andrea Roncoroni

ESSEC Business School

Multiple version iconThere are 2 versions of this paper

Date Written: June 01, 2016

Abstract

We consider the problem of designing a financial instrument aimed at mitigating the joint exposure of energy-linked commitments to random price and volume delivery fluctuations. We formulate a functional optimization problem over a set of regular payoff functions: one is written on energy price, while the other is issued over any index exhibiting statistical correlation to volumetric load. On theoretical grounds, we derive closed-form expressions for both payoff structures under suitable conditions about the statistical properties of the underlying variables; we pursue analytical computations in the context of a lognormal market model and deliver explicit formulas for the optimal derivative instruments. On practical grounds, we first develop a comparative analysis of model output through simulation experiments; next, we perform an empirical study based on data quoted at EPEX SPOT power market. Our results suggest that combined price-volume hedging performance improves along with an increase of the correlation between load and index values. This outcome paves the way for a new class of effective strategies for managing volumetric risk upon extreme temperature waves.

Keywords: volumetric risk, energy risk, corporate financial risk management, contract design, electricity markets

Suggested Citation

Id Brik, Rachid and Roncoroni, Andrea, Static Mitigation of Volumetric Risk (June 01, 2016). Journal of Energy Markets, Vol. 9, No. 2, 2016, Available at SSRN: https://ssrn.com/abstract=2795018

Rachid Id Brik

ESSEC Business School ( email )

3 Avenue Bernard Hirsch
CS 50105 CERGY
CERGY, CERGY PONTOISE CEDEX 95021
France

Andrea Roncoroni (Contact Author)

ESSEC Business School ( email )

Avenue Bernard Hirsch BP 50105
Cergy-Pontoise, 95021
France
+33 (0)1 34 43 32 39 (Phone)
+33 (0)1 34 43 30 01 (Fax)

HOME PAGE: http://www45.essec.edu/faculty/andrea-roncoroni

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
0
Abstract Views
527
PlumX Metrics