Korean Energy Economic Review ISSN:1599-7057(Print) 에너지경제연구

This article theoretically analyzes profit marin hedging can be optimal strategy to buy emission allowances. Target utility function is used to show the expected utility of profit margin strategy is greater than that of other strategies such as always hedging and buying at expiration with spot price. Additionally, this article provides a mathematical proof that Profit margin hedging is more profitable than other strategies if futures prices of emission allowances are mean reverting. Simulations are conducted to compare the expected utility of a profit margin hedging strategy with the expected utility of other strategy. In addition, variance ratio test is conducted to test mean reversion in futures prices of emission allowances.