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Derivatives and Risk Management in the Petroleum, Natural Gas, and Electricity Industries
 

Summary Notes

1 A portfolio of a put and a call option can replicate a forward or a swap. See M. Hampton, “Energy Options,” in Managing Energy Price Risk, 2nd Edition (London, UK: Risk Books, 1999), p. 39.

2 Swaps and other OTC derivatives differ from futures in another functional respect that is related in part to their lack of standardization. Because their pricing terms are not widely disseminated, swaps and most other OTC derivatives generally do not serve a price discovery function. To the extent, however, that swap market participants tend to settle on standardized contract terms and that prices for transactions on those swaps are reported, it is potentially the case that particular swaps could serve this function. An important example is the inter-bank market in foreign currencies, from which quotes on certain forward rates are readily accessible from sizable commercial banks.

3 Federal Energy Regulatory Commission, letter to Sam Behrends, IV, Esq. (May 6, 2002), concerning “Fact-Finding Investigation of Potential Manipulation of Electric and Natural Gas Prices, FERC Docket No. PA02-2-000.”

4 Although most commentators accept that gaming increased prices in California, some analysts argue that the effects, if any, were small. See J. Taylor and P. VanDoren, Did Enron Pillage California?, Briefing Paper No. 72 (Washington, DC: The Cato Institute, August 22, 2002).

5 Federal Energy Regulatory Commission, Regional Transmission Organizations, Order No. 2000, 65 Fed. Reg. 809 (January 6, 2000).

6 Federal Energy Regulatory Commission, Remedying Undue Discrimination through Open Access Transmission Service and Standard Electricity Market Design, Notice of Proposed Rulemaking, 18 CFR Part 35, Docket No. RM01-212-000 (Washington, DC, July 31, 2002), p. 9.

7 S. Mayhew, “The Impact of Derivatives on Cash Markets: What Have We Learned?” Working paper, Department of Banking and Finance, Terry College of Business, University of Georgia (Athens, GA, February 2000).

8 About 36 percent of the firms in this sample that had foreign sales did not hedge. Note that this study did not address the issue of why they failed to hedge if doing so would increase firm value. See G. Allayannis and J. Weston, “The Use of Foreign Currency Derivatives and Firm Market Value,” Review of Financial Studies, Vol. 14 (2001), pp. 243-276.