FORWARD CONTRACTS BASED ON HEDGING STRATEGY IN ELECTRIC POWER MARKETS

Individuals and companies are negotiating in liberalized electricity markets exposing themselves to risks requiring analyses and treatments that are different from those required for other types of commodities. The dynamics of the spot price, together with the need to complete the market covering the exposure to volume risk, make this market different and complex. This paper presents a scheme of static hedging that may be implemented when looking to maximize the expected benefit value adjusted by risk, and when facing volume uncertainty. Under these circumstances, the agent participates in an electricity market whose spot price exhibits seasonality and mean reversion. The only available hedging tool assumed were the forward contracts incorporating a risk premium. The Colombian electric power market was chosen as the case-study, and stochastic calculus and Montecarlo's simulation were used for the theoretical development. It was found that, when the forward risk premium is present, the contract price will drift; hence, an agent's hedging level will depend on their risk aversion level, the expected volatility volume, the long-term risk premium and the expected correlation between the volume and the forward price.