How Can an Energy Producer Hedge Its Risks

question 20

Multiple Choice

How can an energy producer hedge its risks?

• A) Use weather derivatives for price risk and energy derivatives for volume risk
• B) Use energy derivatives for price and volume risk
• C) Use energy derivatives for price risk and weather derivatives for volume risk
• D) Use weather derivatives for price and volume risk

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Definitions:

Generating Revenues

The process by which a company earns income through the sale of goods or services.

Expenses

Outflows or using up of assets, or incurring liabilities, as a result of operational activities intended to generate revenue.

Financial Statement

A summary report that quantitatively describes the financial health of a company, including balance sheets, income statements, and cash flow statements.

Accounts

Records that summarize financial transactions pertaining to a business entity’s assets, liabilities, equity, revenues, and expenses.