The mathematics of hedging

Possessing the knowledge to hedge energy price risks properly is essential and crucial for running a long-term business. In the past, many hedging instruments have been invented and widely used. By using these derivatives, decision makers reduce the price risk to a certain degree. To apply these hedging instruments to the perfect hedging strategies correctly, it is necessary to be familiar with these tools in the first place. This work introduces the financial tools widely applied in hedging, including forward contracts, futures, swaps and options. It also introduces the hedging strategies used on energy hedging. Since individuals are creating strategies according to their unique risk appetite and collected information, this work presents three risk appetites and a method of distinguishing valuable information. With the contribution of this thesis, future works can be done in the field that connect the information valuation and energy hedging by changing the behavior in each risk appetites’ hedging ratio.