Reducing quantity risks would also benefit from reducing risks of post-harvest losses, estimated at 15% to 20% of domestic production.
Despite these gains, Egypt faces a "quantity risk" in the short-term, and quantity risk will continue to rise in the medium and long-term.
Quantity risk could be reduced though not eliminated through domestic production, but not with the current supply chain and system of government intervention.
Wheat imports easily reduce quantity risk, but the bigger issue is really "price risk".
Price risk and reduced purchasing power from the current economic crisis are most relevant today, but quantity risk will also continue to rise.
Deregulation in the United States has given the power industry freedom to conduct its business in a more rational way, but at the same time exposes the industry to price and quantity risks. (9) Variability in weather conditions had always been recognized as one of the most significant factors affecting power consumption, however, the effects of unpredictable seasonal weather patterns had previously been absorbed and managed within a regulated, monopoly environment.
(9) See Brown and Toft (2002) for a discussion of how firms should hedge when faced with both price and quantity risks. Gay, Nam, and Turac (2002) also discuss the use of linear and nonlinear hedging in the face of price and quantity risk.
Power producers facing quantity risk (demand risk), which is primarily caused by weather events, are assumed to choose weather derivatives to extremize an objective function which models their terminal wealth one period later.
Suppose that the power producer's quantity risk can be decomposed into a systematic portion correlated with local weather index (weather risk) and nonsystematic idiosyncratic individual variation.
Under the assumption that quantity risk is linear in local weather index, q = [alpha] + [beta][t.sub.l] + [epsilon], the minimum variances of linear local hedging using OTC local forwards and linear basis hedging using both exchange traded futures and OTC basis forwards are