THE APPLICATION OF DERIVATIVES BY ENERGY COMPANIES IN PRICE RISK MANAGEMENT

Abstract

The process of deregulation on the energy markets has changed priorities and introduced new responsibilities into risk management. Awareness has increased among market participants regarding the importance and necessity for the risk management of electrical energy prices. Due to the nature of electrical energy, there are significant differences in price risk management in comparison to the classical methods used on financial markets. Energy derivatives have an important role in providing price signals, determining correct energy prices and facilitating effective price risk management. The article presents the results of an investigation conducted on a sample of energy companies comprised of members of the European Federation of Energy Traders (EFET). The investigation demonstrated that 75 % of the enterprises from the sample manage the risk from the variable prices of electrical energy by using some type of derivative. The most frequently used instruments are as follows: forwards (68,2 %), options (52,3 %), futures (50 %) and swaps (43,2 %), known as plain vanilla derivatives. Furthermore, it has been demonstrated that the size of enterprises is an influential factor in deciding whether to use derivatives.