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Cross‐hedging and forward‐contract pricing of electricity in the Pacific Northwest
Author(s) -
Woo ChiKeung,
Horowitz Ira,
Olson Arne,
DeBenedictis Andrew,
Miller David,
Moore Jack
Publication year - 2011
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.1533
Subject(s) - futures contract , hedge , spot contract , electricity , forward contract , financial economics , economics , natural gas , business , econometrics , ecology , chemistry , organic chemistry , electrical engineering , biology , engineering
This paper develops a linear regression model for using actively traded NYMEX natural gas futures as a cross‐hedge against electricity spot‐price risk in the Pacific Northwest and for pricing the forward contracts in the presence of temperature and hydro risks. Our approach comports with reality and provides power purchasers with an effective instrument through which they can hedge their electricity bets through natural gas futures. It also demonstrates the sharp month‐to‐month variations in the natural gas futures' optimal hedge ratios and hedge effectiveness. Finally, it finds significant risk premiums in the Pacific Northwest forward prices, supporting the hypothesis that forward‐contract buyers are relatively more risk‐averse than sellers. Copyright © 2011 John Wiley & Sons, Ltd.