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 .


For commodity/Energy deals, the Forward price is modeled directly. For each settlement date T, the SDE for the forward price is:


  • 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