Hedging Strategies in Commodity Markets – Rolling Intrinsic and Delta Hedging for Virtual Power Plants

Abstract

ABSTRACT Hedging on commodity markets is usually done by applying either the rolling intrinsic strategy or the canonical delta hedge strategy. In this paper we introduce, compare and discuss both hedging strategies in the context of virtual power plants (VPP). We formulate the precise relationship of the two strategies mathematically. Our main result is that they are not only very similar regarding hedge construction but also that both strategies are equal in expectation. The proof involves some stochastic calculus and the Brownian local time. We illustrate our findings with simulated data as well as in prototypical market scenarios. These studies show that the rolling intrinsic hedge comes with a riskier profile than the delta hedge.