In a highly volatile market like that of electricity and power, the market players must have a broad range of understanding of the risk management strategies. An appropriate amount of management instruments is required for the certainty of the global performance of the electricity and power markets. It is, therefore, a challenge to the energy regulators to enhance the liquidity of risk management instruments such as “intra-day options”. The primary motive behind hedging for a corporation should be maximizing the standing and value of the firm on a global standing. The value of the product and the prices are enhanced by a reduction in the financial distress and variance of taxable incomes.
Hedging deals with executing several transactions where the expectation is to substantially off-set the risk that is exposed in the project. Hedging involves commercial transactions to reduce risks by transferring the risk to those with opposite risk profiles or with investors who are willing to accept the risk in exchange for an opportunity of profit.
“MK BROKERS AD” could provide you with the opportunities to be flexible and use most of the global strategies for hedging power and other energy contacts.
Below are variety of power hedging strategies:
- Delta hedging is a strategy involving the execution of transactions having equal but opposite delta exposures. This makes “the combinations of the initial portfolio and the hedge transactions” as delta-neutral. Delta neutral means delta of zero. This is generally encountered by forwarding trading or future based contracts. Hedging with futures eliminates the risk of fluctuating prices, but also means limiting the opportunity for future profits should prices move favourably. This occurs because the delta of an option depends on the underlying price.
- Market based – valuation: The model involving the market-based approach is essential for pricing and risk managing these bilateral (sometimes multilateral) power transactions. The valuation involved is conducted by adding the price of the electricity being the variable together with a discounting factor, which significantly increases the intricacies of pricing electricity contracts.
- Dynamic hedging for reducing risks creates least exposures for price volatility and makes more money on the other hand. The market is approached with long flexibility, and there is more active participation in the short-term markets. In its general nature, the risks that are dynamically hedged are a future commercial setting based on production in the future. The risks are hedged through the trade via commodity prices, creating a stabilized environment for the expected cash flow.
- Hedging Tolling contacts: Tolling stands out as an innovative structured transaction employed in the power industry. Electricity tolling agreements, as well as other structured transactions, have played important roles in facilitating risk-sharing and risk-mitigation among independent power producers, utility companies and unregulated power marketers in the restructured power industry. Because of the continuous evolution of the power markets, there will be more transparency of pricing for these complex structured transactions.
- Pure merchant setting: In a pure merchant setting an investor can collect the revenue where power is traded based on a spot market. But on the other hand, the collections are highly unanticipated since they are not independent of the availability of prices when the sale of the project is put up. This option opens a path for the project owner by entering into an option contract with the seller which are generally the sophisticated financial institutions which are not interested in buying electricity but to act as a financier to arrange a deal. The hedging counterparty can sometimes be an unrelated third party. This starts with the seller generally called as the hedging counterparty to “pay the difference between the hedge-specified floor revenue and the power plant’s actual revenue from power sales” in case the revenue generated from the sales is less than the hedge price.
- Revenue Put Option: The Revenue Put Option creates a definite revenue flow from trading power while hedging subsists. It makes sure that the Power project does not suffer, and considerable revenue is generated during the hedging takes place, to secure project financing.