Financial options for price-quantity hedging in competitives power markets ideas for the Colombian case
Author: Vizcaíno Sánchez, Gabriel Andrés
Director(s)/Advisor(s): Cadena Monroy, Ángela Ines; Benavides Estévez-Breton, Juan Mauricio; Alzate Vélez, Juan M.
Publication date: 2010
Content type: Trabajo de grado - Maestría
Starting from the conceptual framework defined by Oum, Oren andDeng, this paper seeks to design financial instruments to offersimultaneous price-quantity hedging in wholesale electricity markets.Instruments designed minimize replicating errors for both power pro-ducers and retailers from a market maker's perspective. An infinitecollection of derivatives ("exotic option") emerges as the solution ofthis price-quantity hedging. This exotic option is then replicated witha portfolio composed by risk free bonds, forward/futures contracts, andstandard options.A dynamic hedging strategy to rebalance agents' position through timeis also proposed. This strategy is found by maximizing a static expec-ted utility problem at options' maturity subject to constraints.The proposed approaches are proven within the Colombian wholesaleelectricity market framework. Results allow to experimentally validatesome theoretical results presented and evidence improvements forpower producers and retailers' profits by following hedging strategiesproposed. Intuition suggests financial instruments proposed would helpto address major problems in the Colombian power market such as lackof liquidity and anonymity present in the current trading scheme.
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