Browsing by Subject "Hedging"
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Item Open Access Assessing the Hedging Value of Wind Against Natural Gas Price Volatility(2014-04-25) Inda, Ada; Wu, Jill; Zhou, DanIn recent years, natural gas prices in the U.S. have reached historic lows and utilities have been rapidly replacing coal with gas-fired generation. Natural gas prices are historically volatile, and overreliance on natural gas can lead to high electricity prices in the event of rising fuel costs or price spikes. We examine how utilities can use wind energy from long-term power purchase agreements (PPAs) as a tool to hedge against natural gas price volatility and future environmental regulations. We assess how federal and state policies affect wind’s hedging value, and provide a case study on how utilities in the Southeast are increasingly importing wind from high capacity regions. We quantify wind’s hedging value by comparing the net present value (NPV) of investment costs for a natural gas combined cycle plant with and without wind generation to meet future demand under uncertainty. We use wind prices from the Lawrence Berkeley National Laboratory national wind PPA sample, and analyze six investment options over a 30-year period using the U.S. Energy Information Administration’s (EIA) AEO 2013 natural gas price scenarios with and without carbon tax, and our own scenarios created using Monte Carlo simulation and Random Walk. Assuming a least-cost framework, we find that the utility would only invest in gas generation under the EIA reference scenario. In our model, the utility will have an NPV cost band from $4.7 to $10.1 billion if they do not hedge with wind, whereas if they add 20% wind to their portfolio, the maximum cost will decrease by $774 million if the worst-case gas price scenario were to occur. By procuring wind energy at fixed prices through long-term PPAs, utilities can reduce their exposure to unfavorable cost outcomes, particularly if a carbon tax of $10 per ton or more is enacted.Item Open Access Essays on Urban and Labor Economics(2011) Hizmo, AurelIn the first chapter of this dissertation I develop a flexible and estimable equilibrium model that jointly considers location decisions of heterogeneous agents across space, and their optimal portfolio decisions. Merging continuous-time asset pricing with urban economics models, I find a unique sorting equilibrium and derive equilibrium house and asset prices in closed-form. Risk premia for homes depend on both aggregate and local idiosyncratic risks, and equilibrium returns for stocks depend on their correlation with city specific income and house price risk. In equilibrium, very risk-averse households do not locate in risky cities although they may have a high productivity match with those cities. I estimate a version of this model using house price and wage data at the metropolitan area level and provide estimates for risk premia for different cities. The estimated risk premia imply that homes are on average about 20000 cheaper than they would be if owners were risk-neutral. This estimate is over 100000 for volatile coastal cities. I simulate the model to study the effects of financial innovation on equilibrium outcomes. For reasonable parameters, creating assets that correlate with city-specific risks increase house prices by about 20% and productivity by about 10%. The average willingness to pay for completing markets per homeowner is between $10000 and $20000. Productivity is increased due to a unique channel: lowering the amount of non-insurable risk decreases the households' incentive to sort on these risks, which leads to a more efficient allocation of human capital in the economy.
The second chapter of this dissertation studies ability signaling in a model of employer learning and statistical discrimination. In traditional signaling models, education provides a way for individuals to sort themselves by ability. Employers in turn use education to statistically discriminate, paying wages that reflect the average productivity of workers with the same given level of education. In this chapter, we provide evidence that graduating from college plays a much more direct role in revealing ability to the labor market. Using the NLSY79, our results suggest that ability is observed nearly perfectly for college graduates. In contrast, returns to AFQT for high school graduates are initially very close to zero and rise steeply with experience. As a result, from very beginning of the career, college graduates are paid in accordance with their own ability, while the wages of high school graduates are initially unrelated to their own ability. This view of ability revelation in the labor market has considerable power in explaining racial differences in wages, education, and the returns to ability. In particular, we find a 6-10 percent wage penalty for blacks (conditional on ability) in the high school market but a small positive black wage premium in the college labor market. These results are consistent with the notion that employers use race to statistically discriminate in the high school market but have no need to do so in the college market.
Item Open Access Improving Financial Statement Footnotes: Evidence from Derivative and Hedging Disclosures(2015) Steffen, ThomasI investigate whether changes in derivative and hedging footnote disclosures required by SFAS 161 affect investor and analyst uncertainty. My study is motivated by accounting standard setters' and researchers' interest in disclosure effectiveness, and by prior research linking investors' interpretations of public information to measures of uncertainty. For a broad sample of firms, I use textual analysis to measure changes in the amount and salience of derivative and hedging information caused by SFAS 161. Using a difference-in-differences design to study the effects of these changes, I find that investor uncertainty is reduced for firms adopting SFAS 161. In addition, I find that for some uncertainty proxies this reduction is greater for firms whose disclosures were more affected by SFAS 161, consistent with the new disclosures improving investor understanding. I also find evidence of a decreased association between bid-ask spread and movements in risk factors, indicating that SFAS 161 reduced uncertainty stemming from these movements.
Item Embargo Information Transparency and Risk Sharing in Commodity Futures Markets(2023) Wang, ShuyanA central function of commodity futures markets is to help firms in the real sector insure against commodity price fluctuations. I examine how greater availability of information about commodity fundamentals (henceforth, information transparency) affects the capacity of these markets to accommodate firms’ hedging needs. Theory suggests that while greater availability of information can reduce adverse selection and increase traders’ willingness to absorb risk, it can also accelerate the realization of risk and hinder the transfer of risk via the markets. Using both cross-sectional variation in information transparency across 26 commodity markets over 20 years and information shocks induced by the launch of the Agricultural Market Information System (AMIS) and the SEC’s revision of firms’ 10-K oil and gas reserve disclosures, I document that information transparency (i) makes it costlier to use commodity futures to hedge commodity price risk and (ii) reduces traders’ propensity to trade futures. Evidence suggests that these findings are consistent with theories positing that information disclosure impairs risk-sharing opportunities. This study contributes new evidence on how information influences the efficient allocation of commodity price risk across the real and financial sectors.