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

Gorge Halkos, Shunsuke Managi, Wilson Clevo

Research output: Contribution to journalArticle

36 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

Fingerprint

Electricity
Costs
Risk management
Industry
Efficient frontier
Purchase
Forward contracts
Electricity distribution

All Science Journal Classification (ASJC) codes

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

Cite this

The efficient frontier for spot and forward purchases : An application to electricity. / Halkos, Gorge; Managi, Shunsuke; Clevo, Wilson.

In: Journal of the Operational Research Society, Vol. 55, No. 11, 01.07.2004, p. 1130-1136.

Research output: Contribution to journalArticle

@article{0b160ba4c7b344e4b794d88bb200ae4f,
title = "The efficient frontier for spot and forward purchases: An application to electricity",
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.",
author = "Gorge Halkos and Shunsuke Managi and Wilson Clevo",
year = "2004",
month = "7",
day = "1",
doi = "10.1057/palgrave.jors.2601769",
language = "English",
volume = "55",
pages = "1130--1136",
journal = "Journal of the Operational Research Society",
issn = "0160-5682",
publisher = "Palgrave Macmillan Ltd.",
number = "11",

}

TY - JOUR

T1 - The efficient frontier for spot and forward purchases

T2 - An application to electricity

AU - Halkos, Gorge

AU - Managi, Shunsuke

AU - Clevo, Wilson

PY - 2004/7/1

Y1 - 2004/7/1

N2 - 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.

AB - 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.

UR - http://www.scopus.com/inward/record.url?scp=7544226186&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=7544226186&partnerID=8YFLogxK

U2 - 10.1057/palgrave.jors.2601769

DO - 10.1057/palgrave.jors.2601769

M3 - Article

AN - SCOPUS:7544226186

VL - 55

SP - 1130

EP - 1136

JO - Journal of the Operational Research Society

JF - Journal of the Operational Research Society

SN - 0160-5682

IS - 11

ER -