# Off-Peak Delta on Baseload Power Deals

#### by Richard Knight

This article provides an explanation for unexpected price exposure arising from a one-day power deal pricing from the monthly part of the forward curve.

Scenario

Deal : A one-day fixed px Baseload Pwr-Swap with settlement period 1d where the price is being stripped from the monthly part of the forward curve. The DeltaByLeg simulation result shows both Peak and Baseload exposure because for this part of the forward curve, the off-peak curve formula is based on monthly gridpoint tenor whereas my deal (although stripping a monthly price) is just for a single day. This means that when the delta exposure is calculated using the off-peak formula, both peak and base delta are calculated.

Explanation

Since there are 12 peak hours per day, Monday thru Friday, on average about 35% of the hours in a month will be peak and 65% offpeak.
The offpeak price price on the curve is then being calculated from the formula:
offpeak_price = (baseload_price – 0.35*peak_price) / 0.65

For a weekday (12 hours peak and 12 hours offpeak), the average price for the day will be:

avg_price = (12*peak_price + 12*offpeak_price) / 24
= 0.5*peak_price + 0.5*offpeak_price
= 0.5*peak_price + 0.5*(1.5*baseload_price – 0.5*peak_price)
which results in the delta values seen.

For a weekend or holiday (24 offpeak hours) the price for the day would be:
avg_price = off_peak_price