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The Role of Futures and Other Energy-Linked Financial Instruments

Mau Rogers and John Elting Treat

Year: 1994
Volume: Volume 15
Number: Special Issue
DOI: 10.5547/ISSN0195-6574-EJ-Vol15-NoSI-15
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Abstract:
Significant volatility has become a way of life in the oil markets. Traders find this level of market volatility attractive. Managers find the uncertainty inherent in this complex and volatile environment both unsettling and expensive. It creates significant economic risk, managerial risk, and capabilities risk. The dramatic explosion in the size and sophistication of oil-linked financial instruments represents a response to volatility. These markets have forced companies to adopt new strategies, business processes, information systems, and organizational structures to remain competitive. We expect the future will see many oil-linked financial markets and products which will provide new risk management tools. These trends will reward firms that can successfully manage risks associated with credit, liquidity, complexity, and financial evaluation.



The Development of a UK Natural Gas Spot Market

Joe Roeber

Year: 1996
Volume: Volume17
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol17-No2-1
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Abstract:
This paper examines parallels between the evolution of spot markets jor oil during the 1980s, particularly Brent, and what is now happening in the UK gas industry. The structure of supply, formerly within the control of British Gas, is breaking up under antitrust and regulatory pressures, and the short-term balancing needs of the system are being externalised. This is giving rise to a spot market. This paper identifies four stages in the development of a spot market, of which the UK market is presently in the first and second stages (physical balancing and the development of price transparency). Feedback effects on prices are already apparent, and the fourth stage, the development of risk management tools, is being discussed. This scenario was drawn up three years ago, based upon the experience of oil before the existence of a gas spot market was acknowledged. It has so far not missed a step. According to this analysis, the question over the extension of this logic to the gas markets in Continental Europe is not whether, but when?



Short-term Hedging for an Electricity Retailer

Debbie Dupuis, Geneviève Gauthier, and Fréderic Godin

Year: 2016
Volume: Volume 37
Number: Number 2
DOI: 10.5547/01956574.37.2.ddup
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Abstract:
A dynamic global hedging procedure making use of futures contracts is developed for a retailer of the electricity market facing price, load and basis risk. Statistical models reproducing stylized facts are developed for the electricity load, the day-ahead spot price and futures prices in the Nord Pool market. These models serve as input to the hedging algorithm, which also accounts for transaction fees. Back-tests with market data from 2007 to 2012 show that the global hedging procedure provides considerable risk reduction when compared to hedging benchmarks found in the literature.



Managing Energy Price Risk using Futures Contracts: A Comparative Analysis

Jim Hanly

Year: 2017
Volume: Volume 38
Number: Number 3
DOI: 10.5547/01956574.38.3.jhan
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Abstract:
This paper carries out a comparative analysis of managing energy risk through futures hedging, for energy market participants across a broad dataset that encompasses the largest and most actively traded energy products. Uniquely, we carry out a hedge comparison using a variety of risk measures including Variance, Value at risk (VaR), and Expected Shortfall as well as a utility based performance metric for two different investor horizons; weekly and monthly. We find that hedging is effective across the spectrum of risk measures we employ. We also find significant differences in both the hedging strategies and the hedging effectiveness of different energy assets. Better performance is found for West Texas Intermediate Oil and Heating Oil while the poorest performer in hedging terms is Natural Gas.





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