Assume the following values:

• Q = F = M = 100 MWh
• the strike price of the CFD is $60/MWh.
• MLP_a = $40/MWh
• MLP_b = $75/MWh

Explain about this hedge. Is this a perfect hedge?

Table 2: Illustration of a perfect hedge involving Financial Transmission Rights and Contracts for Differences. Mechanism Payment to Supplier at node a Payment by consumer at node b Spot Market LMP (a): Q LMP (b). F Megawatt Two-Way CFD at strike price p [p LMP (b)] F [p LMP (b)] F Total p.F p.F +LMP (a) Q -LMP(b) F +LMP (b). -LMP(b) F M Megawatt FTR from node a to node b M [LMP (b) LMP (a)] Total if F = M P.M P.M +LMP(a). +LMP (b). -LMP (b).M -LMP (a).M Total if F = M = Q P.Q P.Q Table 2: Illustration of a perfect hedge involving Financial Transmission Rights and Contracts for Differences. Mechanism Payment to Supplier at node a Payment by consumer at node b Spot Market LMP (a): Q LMP (b). F Megawatt Two-Way CFD at strike price p [p LMP (b)] F [p LMP (b)] F Total p.F p.F +LMP (a) Q -LMP(b) F +LMP (b). -LMP(b) F M Megawatt FTR from node a to node b M [LMP (b) LMP (a)] Total if F = M P.M P.M +LMP(a). +LMP (b). -LMP (b).M -LMP (a).M Total if F = M = Q P.Q P