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HEDGING WITH ELECTRICITY FUTURES Hedge Performance and Market Development in the Nordic Electricity Market

Løvdahl, Ida Tønnessen; Tønjum, Hilde Daae
Master thesis
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2606671.pdf (1.584Mb)
Codes_MasterThesis.pdf (53.69Kb)
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https://hdl.handle.net/11250/2687286
Utgivelsesdato
2020
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Samlinger
  • Master of Science [963]
Sammendrag
This Master Thesis estimates and applies three various futures hedging strategies for the

spot exposures at the Nordic electricity market. We compare the variance and hedging

effectiveness of the traditional naïve hedge, the static Ordinary Least Squares (OLS)

hedge, and the dynamic Constant Conditional Correlation GARCH (CCC-GARCH)

hedge. The various hedging strategies are implemented on monthly- and quarterly futures

contracts with different hedging durations. The key finding of our study is that futures

contracts can reduce some price uncertainty compared to an unhedged position, even with

the lack of straight forward arbitrage possibilities in the electricity market. The results

indicate that dynamic hedge ratios can in some cases be more efficient than a static

approach, when ARCH-effects are present. Furthermore, we find that an electricity

producer will not benefit from hedging over a longer duration. The main reason for this

is that that the correlation between spot- and futures returns are generally higher for the

contracts with a shorter duration. This might indicate that noise in the Nordic electricity

market is not cancelled over time. We find that both spot- and futures returns have

developed to become even more volatile over the years, which may be explained by the

market developing towards more renewable- and intermittent energy.
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Masteroppgave(MSc) in Master of Science in Business, Finance - Handelshøyskolen BI, 2020
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