Hezelaer Energy Company Case

The portfolio managers aim in the hedging process is to obtain minimum expected costs of the consumption load, hence the lowest or minimum possible forward hedge price, within the companies accepted risk levels. In How can a company define a risk level which is acceptable and what is acceptable?
Once a standardized product is hedged in the wholesale market, the price risk is no risk any more, because it has been transferred to the seller of that contract, only a fractional part which could be defined as credit or counterparty risk, and could be fully eliminated by entering a future or cleared hedge contract. Than one has mitigated the credit risk, but created a cash flow risk due to the initial margining and daily margin calls of the clearing house involved. Once a position is hedged with a standardized …show more content…
Although the client base of Hezelaer are businesses and households, consumers, Hezelaer is typically subject to a fixed (or slowly-varying) price per MWh so, Hezealer needs to decide wheather they want to wait to buy the required electricity amount for each individual hour on the APX (spot market), or hedge its obligations in advance by buying forwards, options or a combination of them. There are other utility companies who also own generation assets which act as a natural hedge for their obligations.
Overlooking the expected consumption load of a supplier, one have to decide when and which contracts to hedge in order to deal with the price risk, which is one of the risks which could have a major effect on the company's expected cash flows. But next to the price risk we can conclude other costs and risks involved like the costs of shaping, short and long-term forecasting risks, 1/4 hour structure