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Water 2018, 10(8), 1026; https://doi.org/10.3390/w10081026

An Optimal Model for Water Resources Risk Hedging Based on Water Option Trading

1
College of Hydrology and Water Resources, Hohai University, No.1 Xikang Road, Nanjing 210098, China
2
National Engineering Research Center of Water Resources Efficient Utilization and Engineering Safety, Hohai University, No.1 Xikang Road, Nanjing 210098, China
3
School of Earth Sciences and Engineering, Hohai University, No.1 Xikang Road, Nanjing 210098, China
*
Author to whom correspondence should be addressed.
Received: 18 June 2018 / Revised: 26 July 2018 / Accepted: 31 July 2018 / Published: 3 August 2018
(This article belongs to the Section Water Resources Management and Governance)
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Abstract

The uncertainty of forecasted runoffs brings risks of water shortages to water users in the intake area of long-distance water transfer projects, and the uncertainty of spot market prices may cause them to buy water at high prices. In order to hedge these risks, this paper proposes a risk hedging model for decision-making in water option trading from the viewpoint of water users. With the objective of maximizing the expected revenue of water users, the proposed model was solved by an analytical method and an optimal water option strategy was obtained for the users. The proposed model is applied to an intake area of an inter-basin water transfer project in China. The results show that the proposed water option trading model can provide water users with an optimal option strategy. The optimal options trading strategy can effectively reduce the risk caused by the uncertainties of forecasted runoffs and water prices. We also explored the influence of the uncertainty degree of the forecasted runoffs and water price on the option trading strategy. The results show that the expected revenue of water users increases as the variances of the errors of forecasted runoffs and water prices increase. View Full-Text
Keywords: water resources; water option; uncertainty; risk hedging; optimal strategy water resources; water option; uncertainty; risk hedging; optimal strategy
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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).
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Yan, H.; Zhong, P.-A.; Chen, J.; Xu, B.; Wu, Y.; Zhu, F. An Optimal Model for Water Resources Risk Hedging Based on Water Option Trading. Water 2018, 10, 1026.

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