Please use this identifier to cite or link to this item: http://hdl.handle.net/10397/29033
Title: Electricity market risk management using forward contracts with bilateral options
Authors: Chung, TS
Zhang, SH
Yu, CW
Wong, KP
Issue Date: 2003
Publisher: The Institution of Engineering and Technology
Source: IEE proceedings. Generation, transmission, and distribution, 2003, v. 150, no. 5, p. 588-594 How to cite?
Journal: IEE proceedings. Generation, transmission, and distribution 
Abstract: Extreme short-term price volatility in competitive electricity markets creates the need for risk management arrangements. A new electricity forward contract with bilateral financial options is introduced, which allows both seller and buyer to take advantage of flexibility in generation and consumption to obtain monetary benefits while simultaneously removing the risk of market price fluctuations. The option theory is incorporated to formulate the contract price. The strike prices of options are derived from solving an equilibrium model in which both the buyer and the seller aim to maximise their own profit. Theoretical analysis shows that the proposed optional forward contract presents a more equitable and reasonable payoff structure that allows the buyer and seller to earn a larger overall expected benefit, and the contractual arrangement supports efficiency in economic dispatch of electricity production and consumption. The insights obtained from these results will be helpful to participants' in the contractual decision-making process.
URI: http://hdl.handle.net/10397/29033
ISSN: 1350-2360
EISSN: 1751-8695
DOI: 10.1049/ip-gtd:20030532
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