A financial contract (specifically an electricity derivative) which allows the holder to pay a fixed price for underlying electricity irrespective of the floating electricity price over a specified period of time. The holder could also pay a floating price against receiving a fixed price. Like other types of swaps, an electricity swap is equivalent to a strip of forward contracts with multiple settlement dates and identical forward price for each settlement. The asset underlying the forward contracts is, of course, electricity price. Electricity swaps are established for a fixed amount of power with reference to a variable spot price at either of two locations: a generator’s plant or consumer’s premises. These swaps are widely used to provide short- to medium-term hedge against price uncertainty.
Derivatives
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