The hedge covers normal demand, not the heatwave
A retailer has a fixed-volume swap but customer load rises during an expensive afternoon. The trading desk must explain why a hedge did not prevent a loss.
Permanent case linkYour task
Reconcile physical purchases, swap receipts and retail contribution. Test additional hedge volume without treating it as risk-free protection.
Your role
Retail portfolio analyst preparing a daily exposure note
Practice data & worked solution
Volume risk behind a fixed-price sale
Original synthetic three-hour scenario at one price reference. Each interval lasts one hour. Retail receipts are A$130 per customer MWh. A 50 MW financial swap receives spot and pays A$80/MWh. Ignore premiums, losses, network charges, customer defaults, taxes and collateral. The calculated contribution is not company profit.
| Hour | Customer load MW | Spot AUD per MWh | Swap MW | Swap strike AUD per MWh |
|---|---|---|---|---|
| 1 | 40 | 50 | 50 | 80 |
| 2 | 60 | 200 | 50 | 80 |
| 3 | 80 | 500 | 50 | 80 |
Your analysis
- Calculate physical spot cost, swap receipts, net procurement cost and contribution after retail receipts.
- Increase swap volume to 70 MW throughout. Show the change in contribution and explain the remaining shape exposure.
- Keep the 70 MW swap but set all prices to A$30/MWh and all loads to 40 MW. Compare this result with a 50 MW swap and explain the over-hedge risk.
Worked solution
Base reconciliation
Physical purchases cost A$54,000. Swap receipts are −A$1,500, A$6,000 and A$21,000, totalling A$25,500. Net procurement cost is A$28,500. Retail receipts are 180 × 130 = A$23,400, so contribution is −A$5,100. The fixed hedge leaves 30 MWh exposed in the most expensive hour.
More volume, different exposure
A 70 MW swap receives A$35,700 in total. Net procurement cost falls to A$18,300 and contribution rises to A$5,100. Residual load minus hedge is −30, −10 and +10 MWh. The first two hours are over-hedged; this is not a fully shaped hedge.
Low-price transfer
Under the new load and prices, physical cost is A$3,600 and retail receipts A$15,600. The 70 MW swap pays A$10,500, giving net procurement A$14,100 and contribution A$1,500. A 50 MW swap pays A$7,500 and yields A$4,500 contribution. The extra hedge worsens this scenario by A$3,000. Set limits using multiple load-price scenarios, not one heatwave.
Review your response
- Signs: swap receipts turn negative below strike.
- Reconciliation: physical cost minus hedge receipts equals net procurement cost.
- Risk: volume, shape and price-reference risk are distinguished.
- Governance: the recommendation names forecast, credit and limit evidence still required.
This checklist supports self-review. No tutor marking or independent credential is included.
Related topics 4
Sources & evidence
All figures are original teaching inputs, not observations or published forecasts. The official source supplies industry context, not this dataset. Source link checked 17 October 2026. A real assessment also needs load forecasts, executed hedge confirmations, customer tariffs and collateral terms.
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