Contracts for difference and risk management in multi-agent energy markets

Abstract

The liberalization process of the power sector has led to competitive wholesale and retail markets. Market participants are exposed to risks associated with price volatility and uncertainties regarding production and consumption. This paper addresses these issues by analyzing and evaluating the role of contracts for difference (CFDs) as a financial product used to hedge against risk. The article presents several key features of software gents able to negotiate CFDs, paying special attention to risk management, notably risk attitude, and price negotiation. It starts with a contextualization of the subject, which is followed by the definition of a model to negotiate CFDs, involving several trading strategies and tactics. It starts with a contextualization of the subject, which is followed by the definition of a model to negotiate CFDs, involving a group of strategies to control the exposure of risk by software agents. Finally, a set of case studies is described to assess the performance of CFDs as a risk management tool and to compare their performance to forward bilateral contracts.