The efficient frontier for spot and forward purchases: An application to electricity

Gorge Halkos, Shunsuke Managi, Wilson Clevo

Research output: Contribution to journalArticlepeer-review

39 Citations (Scopus)

Abstract

A local electricity distribution company (LDC) can reduce its exposure to the inherent risks of spot-price volatility and uncertain future demand via forward contracts. Management's problem is to determine the optimal forward-contract purchase. We propose a practical three-stage approach for dealing with the problem. The first stage determines art optimal purchase by solving a cost-constrained risk-minimization problem. The second stage derives the efficient frontier of tradeoffs between expected cost and cost risk from the first-stage solution, at various bounds on the expected cost. The optimal solution is found by melding the frontier with management's risk preferences. In the third stage, the model's parameters are estimated from data typically available to an LDC and used to determine its forward-contract purchase.

Original languageEnglish
Pages (from-to)1130-1136
Number of pages7
JournalJournal of the Operational Research Society
Volume55
Issue number11
DOIs
Publication statusPublished - Jul 1 2004
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Management Information Systems
  • Strategy and Management
  • Management Science and Operations Research
  • Marketing

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