Hedging Expected Losses on Derivatives in Electricity Futures Markets

Adrien Nguyen Huu (1, 2) , Nadia Oudjane (1, 3)

1 FiME Lab - Laboratoire de Finance des Marchés d'Energie
2 IMPA - Instituto Nacional de Matemática Pura e Aplicada
3 EDF R&D - EDF R&D

We investigate the problem of pricing and hedging derivatives of Electricity Futures contract when the underlying asset is not available. We propose to use a cross hedging strategy based on the Futures contract covering the larger delivery period. A quick overview of market data shows a basis risk for this market incompleteness. For that purpose we formulate the pricing problem in a stochastic target form along the lines of Bouchard and al. (2008), with a moment loss function. Following the same techniques as in the latter, we avoid to demonstrate the uniqueness of the value function by comparison arguments and explore convex duality methods to provide a semi-explicit solution to the problem. We then propose numerical results to support the new hedging strategy and compare our method to the Black-Scholes naive approach.

Mots clés: stochastic target; partial hedging; loss control; HJB equation; electricity markets; numerical scheme

Domaines: Optimisation et contrôle [math.OC]

Adrien Nguyen Huu, Nadia Oudjane. Hedging Expected Losses on Derivatives in Electricity Futures Markets. Commodities, Energy and Environmental Finance, 74, Springer, 2015, Fields Institute Communications, 978-1-4939-2733-3. ⟨hal-00940327⟩