AbstractHedging is universally recognized as a useful operational practice in surface water reservoirs to temporally redistribute water supplies and thereby avoid large, crippling water shortages. When based on the zones of available water in storage, hedging has traditionally involved a static rationing (i.e. supply to demand) ratio. However, given the usual seasonality of reservoir inflows, it is also possible that hedging could be dynamic with seasonally varying rationing ratios. This study examined the effect of static and dynamic hedging policies on the performance of the Pong reservoir in India during a period of climate change. The results show that the reservoir vulnerability was unacceptably high (≥60%) without hedging and that this vulnerability further deteriorated as the catchment became drier due to projected climate change. The time- and volume-based reliabilities were acceptable. The introduction of static hedging drastically reduced the vulnerability to <25%, although the hedging reduction in the water supplied during normal operational conditions was only 17%. Further analyses with dynamic hedging provided only modest improvements in vulnerability. The significance of this study is its demonstration of the effectiveness of hedging in offsetting the impact of water shortages caused by climate change and the fact that static hedging can match more complex dynamic hedging policies.
Pricing options on illiquid assets with liquid proxies using utility indifference and dynamic-static hedging