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Due to climate changing, global warming, the uncertainty of power demand and supply has increased, which have impact on the volatility of power price, and power company's earnings. Therefore the perfect risk management framework is real needed for the power companies.
In this paper, we collect the two largest listed power companies' quarterly of earnings datas and the power price、temperature datas in PJM, and estimate the power price and temperature's stochastic process. Get the options value and hedging ration by Monte Carlo Simulation method. At last, we calculate quarterly earnings of the power companies and compare the difference between earnings with hedge and that without hedge position.
The result shows, the power companies can decrease the VaR and standard deviation of their quarterly earnings if they have used the options, which means through the options the power companies have the ability to lower the downside risk and overall risk, moreover the result also shows the hedging power of election options are better than weather options.
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