Delta Hedging Energy Portfolios: an Exploratory Study

Delta hedging, although widely used in commodity markets, needs to be further adapted to electricity markets. Given the extreme volatility of electricity prices, even a portfolio whose market value is perfectly hedged may still yield large and potentially unacceptable cash-flow swings in the short term. Thus, hedging strategies may need to meet multiple, if not conflicting, objectives: one is to secure the market value of a portfolio, and another is to avoid large cash-flow variations in a given time period. This paper analyses both objectives, explores several hedging strategies tailored to each, and compares their relative efficiency