Natural Gas Hedging

Preface

Introduction

Hedging instruments

Purposes of hedging natural gas

Volatility reduction

Hedge gain maximization and other extensions of risk management

Speculation versus hedging

Hedgemasters

Portfolios

Four hedging strategies

Pure futures strategies

Always selling 12 months forward

Selectively selling three months forward

Selling forward in backwardized markets

Pure options strategies

Selling options

Options combination strategies

The bear spread

The straddle

The strangle

Collars

Hedging by condition: backwardized and contango markets

Call options in a backwardized market

Hedging in bear markets

In-, out-of-, and near-the-money options

Layer upon layer

Exotic (Asian) options strategies

Consumer risk management

Background and history

Hedging strategies

Example 1. Petrochemical plant hedging gas feedstock costs

Example 2. An LDC hedging against rising prices

Example 3. An electricity utility hedging the spark spread

Weather derivatives to hedge volume at risk

Weather gas demand correlations

Hedging parameters for winter exposures

Pricing a weather deal

The role of weather forecasts

The role of storage in a hedging program

Future prospects

Conclusions

Winners and losers

Energy consumers

The last word: does basis risk render all of this moot?

Notes