Engineering Commons^™

The Efficacy Of Financial Futures As A Hedging Tool In Electricity Markets, Jim Hanly, Lucia Morales, Damien Cassells

Articles

Abstract This paper estimates and applies a risk management strategy for electricity spot exposures using futures hedging. We apply our approach to three of the most actively traded European electricity markets, Nordpool, APXUK and Phelix. We compare both optimal hedging strategies and the hedging effectiveness of these markets for two hedging horizons, weekly and monthly using both Variance and Value at Risk (VaR). Our key finding is that electricity futures can effectively manage risk only for specific time periods when using hedging strategies that have been very successful in financial and other commodity markets. More generally they are ineffective as …