Optimal Hedging and Carryover Storage Value

Abstract

Properties of optimal hedging for water supply releases from reservoirs are developed and discussed. The fundamental decision of how much water to release for beneficial use and retain for potential future use is examined analytically. Explicit correspondence is established between optimal hedging and the value of carryover storage. This more analytical view of hedging rules is useful for better understanding optimal hedging and simplifying numerical optimization of hedging operating rules. The derivations suggest the frequent optimality or near-optimality of two-point hedging policies for water supply operations.