Analysis of the financial margins required to hedge risks in electric power futures markets

Authors

  • Javier Pantoja-Robayo Universidad EAFIT
  • Kelly Maradey Angarita Empresas Públicas de Medellín
  • Alfredo Trespalacios Carrasquilla Instituto Tecnológico Metropolitano

DOI:

https://doi.org/10.17230/ecos.2017.45.4

Keywords:

Value at Rissk, Conditional Value at Risk, Colombia, Electric power futures market, Electric power spot market

Abstract

One of the strengths of futures markets is the elimination of counterparty risk, but to accomplish this, it is important to consider the financial guarantees the clearing house requires from market participants. These margins must hedge the risk related to extreme variations in the product price, but they should not be excessive to avoid limiting the number of participants in the market. In this paper we propose a new methodology to provide appropriate margins in the electric power futures market, and we present an application for the Colombian market. We conduct a Monte Carlo simulation to assess the daily changes of the futures price and estimate measures of risk for different scenarios for “El Niño” weather conditions, holding periods, and expiration times. We find that the new methodology substantially modifies required financial guarantee levels compared to the methodology currently used to calculate margins.

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Author Biography

  • Javier Pantoja-Robayo, Universidad EAFIT

    Javier is a Professor and researcher at the Finance Department, Director of the MSc. in Finance and Academic Coordinator AACSB International Acreditation. PhD in Administration with emphasis in Finance from HEC of Montreal - EAFIT, he received grade of honor “Magna Cum Laude” for his doctoral thesis “Three Essays on Risk Management in Electric Power Markets”​. Professor Pantoja has a background in Operations Research from the University of Milan-Italy LIUC for Italian Government Scholarship. He is member of Energisk, the research and consulting network in energy and commodity finance.

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Published

2018-02-02

Issue

Vol. 21 No. 45 (2017)

Section

Articles

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How to Cite

Pantoja-Robayo, J., Maradey Angarita, K., & Trespalacios Carrasquilla, A. (2018). Analysis of the financial margins required to hedge risks in electric power futures markets. Ecos de Economía, 21(45). https://doi.org/10.17230/ecos.2017.45.4

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