Forward Curve
Energy prices do not necessarily follow the same behaviour as other financial assets. Let denote the forward price at time t for settlement at time . The (initial) forward price curve is specified at discrete settlement dates . Linear interpolation is used for other settlement dates T and:
,
where is either the least index for which , or if .
CSForwardPriceModel
For commodity/Energy deals, the Forward price is modeled directly. For each settlement date T, the SDE for the forward price is:
Where:
- is the drift rate
- is the volatility
- is the mean reversion speed
- is the standard Weiner Process
Final form of the model is
Where is a standard Ornstein-Uhlenbeck Process with variance:
The spot rate is given by