Residual shape risk on natural gas market with mixed jump diffusion

Vol: 
34/2019
Author name: 
Janda K
Kourilek J
Year: 
2019
Month: 
May
Abstract: 

This paper introduces residual shape risk as a new subclass of energy commodity risk. Residual shape risk is caused by insufficient liquidity of energy forward market when retail energy supplier has to hedge his short sales by a non-flexible standard baseload product available on wholesale market. Because of this inflexibility energy supplier is left with residual unhedged position which has to be closed at spot market. The residual shape risk is defined as a difference between spot and forward prices weighted by residual unhedged position which size depends on the shape of customers’ portfolio of a given retail energy supplier. We evaluated residual shape risk over the years 2014 - 2018 with a real portfolio of a leading natural gas retail supplier in the Czech Republic. The size of residual shape risk in our example corresponds approximately to 1 percent of profit margin of natural gas retail supplier.

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