Evaluation of static hedging strategies for hydropower producers in the Nordic market

In this paper we develop an optimization model to derive static hedging strategies for hydropower producers. We use this model to propose strategies with different risk characteristics. Previous research has primarily considered dynamic hedging strategies; however, static hedging strategies are the common choice among practitioners because of their simplicity. Our contribution will therefore be to evaluate the performance of static hedging strategies for hydropower producers. The strategies are tested and compared with the natural hedging strategy, which means no hedging, on historical and predicted data. The results show that hedging with use of forward contracts significantly reduces the risk in terms of VaR, CVaR, and standard deviation of the revenue. Furthermore, this improvement results in just a minor reduction of the mean revenue. Our results imply that despite its simplicity, static hedging strategies are useful for hydropower producers in means of risk reduction at a small cost.