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The Value of Commodity Purchase Contracts With Limited Price Risk

Elizabeth Olmsted Teisberg and Thomas J. Teisberg

Year: 1991
Volume: Volume 12
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol12-No3-8
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Abstract:
This paper describes and demonstrates the equilibrium market valuation of commodity purchase contracts with price ceilings or price floors or both. These contracts, which we call "limited price risk" contracts, are significantly easier for buyers and sellers to agree upon than fixed price contracts when price uncertainty is high and buyers and sellers have inconsistent price expectations. Analysis of an actual natural gas contract as well as the existence of many brokers promoting limited price risk gas contracts, suggest that these contracts may be priced inefficiently in practice. Our example application should help managers to make use of modem financial techniques in assessing the value of these types of contracts.



Carbon Tax or Carbon Permits: The Impact on Generators Risks

Richard Green

Year: 2008
Volume: Volume 29
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol29-No3-4
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Abstract:
Volatile fuel prices affect both the cost and price of electricity in a liberalized market. Generators with the price-setting technology will face less risk to their profit margins than those with costs that are not correlated with price, even if those costs are not volatile. Emissions permit prices may respond to relative fuel prices, further increasing volatility. This paper simulates the impact of this on generators� profits, comparing an emissions trading scheme and a carbon tax against predictions for the UK in 2020. The carbon tax reduces the volatility faced by nuclear generators, but raises that faced by fossil fuel stations. Optimal portfolios would contain a higher proportion of nuclear plant if a carbon tax was adopted.



Volatility Dynamics and Seasonality in Energy Prices: Implications for Crack-Spread Price Risk

Hiroaki Suenaga and Aaron Smith

Year: 2011
Volume: Volume 32
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol32-No3-2
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Abstract:
We examine the volatility dynamics of three major petroleum commodities traded on the NYMEX: crude oil, unleaded gasoline, and heating oil. Using the partially overlapping time-series (POTS) framework of Smith (2005), we model jointly all futures contracts with delivery dates up to a year into the future and extract information from these prices about the persistence of market shocks. The model depicts highly nonlinear volatility dynamics that are consistent with the observed seasonality in demand and storage of the three commodities. Specifically, volatility of the three commodity prices exhibits time-to-delivery effects and substantial seasonality, yet their patterns vary systematically by contract delivery month. The conditional variance and correlation across the three commodities also vary over time. High price volatility of near-delivery contracts and their low correlation with concurrently traded distant contracts imply high short-horizon price risk for an unhedged position in the calendar or crack spread. Price risk at the one-year horizon is much lower than short-horizon risk in all seasons and for all positions, but it is still substantial in magnitude for crack-spread positions. Crack-spread hedgers ignore nearby high-season price risk at their peril, but they would also be remiss to ignore the long horizon.



Oil Price Risk and Financial Contagion

Khaled Guesmi, Ilyes Abid, Anna Creti, and Julien Chevallier

Year: 2018
Volume: Volume 39
Number: Special Issue 2
DOI: 10.5547/01956574.39.SI2.kgue
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Abstract:
In this paper we test for the existence of equity market contagion, originating from oil price fluctuations, to regional and domestic stock markets. The data are collected over the period from April 1993 to April 2015. We apply an empirical multifactor asset pricing model with three-factor setting to capture the unexpected return and disentangle simple correlation due to fundamentals and contagion. We investigate four regions: the European Monetary Union (EMU), Asia-Pacific (AP), the Non-European Monetary Union (NEMU) and North America (NA). We define contagion as the excess correlation that is not explained by fundamental factors. Oil price risk is shown to be a factor as important as contagion. In addition, oil price fluctuations amplify contagion in the context of regional markets strongly interlinked with the USA.



Renewable Generation Capacity and Wholesale Electricity Price Variance

Erik Paul Johnson and Matthew E. Oliver

Year: 2019
Volume: Volume 40
Number: Number 5
DOI: 10.5547/01956574.40.5.ejoh
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Abstract:
The share of electric power generated from renewable energy sources such as wind and solar must increase dramatically in the coming decades if greenhouse gas emissions are to be reduced to sustainable levels. An under-researched implication of such a transition in competitive wholesale electricity markets is that greater wind and solar generation capacity directly affects wholesale price variability. In theory, two counter-vailing forces should be at work. First, greater wind and solar generation capacity should reduce short-run variance in the wholesale electricity price due to a stochastic merit-order effect. However, increasing the generation capacity of these technologies may increase price variance due to an intermittency effect. Using an instrumental variables identification strategy to control for endogeneity, we find evidence that greater combined wind and solar generation capacity is associated with an increase in the quarterly variance of wholesale electricity prices. That is, the intermittency effect dominates the stochastic merit-order effect.



Increasing or Diversifying Risk? Tail Correlations, Transmission Flows and Prices across Wind Power Areas

Johannes Mauritzen and Genaro Sucarrat

Year: 2022
Volume: Volume 43
Number: Number 3
DOI: 10.5547/01956574.43.3.jmau
View Abstract

Abstract:
As wind power costs have declined, capacity has grown quickly, often times in adjacent areas. Price and volatility risk from wind power's intermittency can be mitigated through geographic diversification and transmission. But wind power generation has a fat-tailed and right-skewed distribution. In this article we investigate how geographic diversification of wind power and the effect of wind power on market prices varies across the distribution of production. In a case study from Denmark and Sweden, we show that during tail-end production periods, correlations between areas increase substantially as does congestion in the transmission network. This leads to highly non-linear price effects. The marginal effect of wind power on the local prices is shown to be substantially higher at the 10th decile of wind power production. This has implications for valuation models of wind power projects and for operations of electricity markets with high penetrations of wind power.





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