Risk modelling and Optimization of Hedging Strategy for a Norwegian Hydropower Producer
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- Master of Science 
Presented in collaboration with Hafslund Eco, this thesis examines the process of decision making for a Norwegian hydropower producer over the medium term. As part of this process, risk modelling and optimization of the hedging strategy are undertaken in order to establish an e↵ective frontier between the expected income and downside risk. The e↵ective frontier reveals the relationship between expected income and downside risk, more specifically how minimizing downside risk influences expected income. Having such a model available is a valuable decision support tool for anyone involved in managing the hedging portfolio of a hydropower company. Therefore, the author of this thesis considers it to be an important element of risk management. The main contributions made by this thesis include a stochastic optimization model for optimizing the hedging portfolio of a Norwegian hydropower producer and a general analysis of this model. Additionally, this thesis examines the cost of eliminating the lower-tail outcomes. By eliminating lower-tail outcomes from the revenue distribution, higher-tail outcomes are to some extent eliminated as well. However, this depends on the distribution of the price scenarios and how volatile these are. The model can be used for speculative trading as well as for hedging. As a result, the thesis compares the two scenarios in terms of expected income, low income scenarios and high income scenarios. The thesis concludes with a discussion of tax e↵ects on downside risk and hedging.
Masteroppgave(MSc) in Master of Science in Business Analytics - Handelshøyskolen BI, 2022