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Setting up Your Energy Derivatives Policy

  • Peter C. Fusaro
  • Tom James
Part of the Finance and Capital Markets book series (FCMS)

Abstract

If you buy or sell energy, at some point you will be at risk, so it makes sense to hedge. We are not talking about the kind of hedging that defends against volatility, because the single biggest fact of energy markets is that prices fluctuate wildly, and unexpectedly, particularly since the deregulation of markets. In order to monitor the effectiveness of energy derivatives properly and also to control their use within your organization it is important to set up a clear energy derivatives policy. Company shareholders are usually very demanding: on the one hand, they don’t want companies to hedge away any of their upside profit potential, and on the other, they hate to see too much downside potential loss exposure. An energy consumer that implements a bad hedging strategy may end up paying high fixed prices for energy while its competitors pay lower spot prices. So how does a company choose the correct hedging strategy?

Keywords

Hedging Strategy Price Risk Derivative Contract Budget Level Energy Derivative 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© Peter C. Fusaro and Tom James 2005

Authors and Affiliations

  • Peter C. Fusaro
  • Tom James

There are no affiliations available

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