Financial vs. Physical Hedginge

Hedges might be arranged and executed on a financial or a physical basis, choice depends of structure of exposure and preferences of the client.

Financial

• Structures might be tailored to the even utmost complicate exposure
• For weather risk takers weather is core competence, other than their physical peers they provide hedges against almost any kind of exposure
• Weather exposures of the thermal energy industry can be hedged almost without any basis risk
• Regionally distributed exposures are hedgeable by basket approaches
• Whilst remaining basis risk is mostly neglectible for thermal energy clients it's bigger for Renewables
• For the latter ERS is able to provide innovative solutions
• ​High client protection as financial business is heavily regulated​

Physical

• Weather derivatives might also be embedded into physical energy delivery or offtake contracts 
  
• For physical risk takers weather is not core competence so they only offer it on an opportunistic basis or hedge themselves out in the financial markets
  
• There are also accounting and reporting differences between physical and financial transactions, for financial transactions risk takers normally take care of this​