The hedging effect

When evaluating a new project, especially one that is marginal, executives often ask: how would the net present value (NPV) change if we were to hedge a portion of the risk? While this is a simple question, the answer is not, and depends on a number of factors – the instrument used for hedging, the market price curves and curves for project evaluation, and even the company’s own view of risk.

Consider a potential power plant investment of €250 million. Based on the heat rate of the plant and

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