The Risk that Wasn't Hedged: So What's Your Gamma Position?
Power markets often show coincident peaks in price and volume.
That can make profit unusually volatile.Force equals mass times acceleration (F=ma). Any student of physics should know this equation. In other words, force doesn't just increase with added mass; rather, it accelerates in its strength.
The same can be said for profits in the energy business. For in power markets, the moment of maximum liability to supply the highest volume of electricity to meet retail demand often corresponds precisely with the highest of superpeaks in the wholesale price of energy. This conspiracy of events-so crucial to understanding the energy business-can produce a surprisingly rapid rise or fall in profits. And this risk, known in finance as "gamma" risk," may well have escaped much notice among utilities and load-serving entities.
To understand how and why, remember that in most states, deregulation largely means a disaggregation of generation from retail load. That event carries profound risk management consequences that can be analyzed using the financial market concept of gamma risk.
The Risk That Wasn't Hedged: So What's Your Gamma Position?
Deck:
Power markets often show coincident peaks in price and volume. <br>That can make profit unusually volatile.
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