Cutting edge: Hedging price and volumetric risks of fixed-price load-serving contracts in natural gas markets

In this article, Ning Zhang and Robert Cumbie propose a utility maximisation method for natural gas marketers to find optimal hedging strategies to deal with price and load uncertainty by using price and weather derivatives. Monte Carlo simulation results show that weather swaps can be an effective hedging instrument against volumetric risk in the natural gas industry, where the volatility of gas prices is relatively low and does not drive most of the cashflow variability

Natural gas meters

With the deregulation of the natural gas industry over the past 20 years, local distribution companies (LDCs) in many US states have been exploring and instituting retail choice programmes. These initiatives allow natural gas end-users to purchase natural gas from competitive marketers. Natural gas marketers and other load serving entities (LSEs) usually offer two forms of price plans – competitive fixed and variable price plans. Increasingly, risk-averse retail customers choose fixed-price

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