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Enron

Going by the effect of change in temperature in the past four years on the revenues of PNW, we know that a hedge against weather risk is of paramount importance for Mary Watts, the chief financial officer of PNW. The net income of PNW for 1999 was only 8 million while the yearly capital expenditure from 1995-1999 was 1 billion. Under this red ink budget, it came as no surprise when the equity and debts holders increased their required compensation of risk. This high cost of capital further worsened the future EPS prospects of PNW. With the forecast for two warm winters, PNW would be better off reducing their exposure to weather risks by considering the weather derivatives.

Forecast of HDD
The correlation of the electricity demand to the change of HDD is about 91.7%. The demand of electricity also represents the profits PNW can earn. In order to hedge the loss that unstable weather may bring, PNW could buy weather derivative contracts. If we could accurately predict the HDD next......


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Approximate Word Count: 1851
Approximate Pages: 8 (250 words per double-spaced page)

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