The forward curve is a function graph in

finance Finance refers to monetary resources and to the study and Academic discipline, discipline of money, currency, assets and Liability (financial accounting), liabilities. As a subject of study, is a field of Business administration, Business Admin ...

that defines the prices at which a contract for future delivery or payment can be concluded today. For example, a futures contract forward curve is prices being plotted as a function of the amount of time between now and the expiry date of the futures contract (with the spot price being the price at time zero). The forward curve represents a term structure of prices.

Forward interest rate

A forward interest rate is a type of

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, ...

that is specified for a loan that will occur at a specified future date. As with current interest rates, forward interest rates include a term structure which shows the different forward rates offered to loans of different maturities. According to the unbiased expectations hypothesis, forward interest rates predict spot interest rates at the time the loan is actually made, but many analysts dispute whether this is true, as it ignores durational risk. This figure is part of the lending & credit industry and is related as well to the " expectations theory" which states that forward interest rates can be used as forecasts for future interest rates. Investors expecting higher short-term interest rates are more likely to buy bonds maturing in the short term. If they were to park money into a long term debt they might not be able to make as much interest. Finance analysts can refer to a graph of forward interest rate values over different time periods, the forward curve, to evaluate the

time value of money The time value of money refers to the fact that there is normally a greater benefit to receiving a sum of money now rather than an identical sum later. It may be seen as an implication of the later-developed concept of time preference. The time ...

Price forward curve

A Price forward curve (short ''PFC'') reflects specialties of the commodity market such as: * Transporting commodities is costly and time-consuming. * It is costly to store commodities - power storage is often prohibitively expensive. * Many commodities show a strong seasonality, e.g. there is more

natural gas Natural gas (also fossil gas, methane gas, and gas) is a naturally occurring compound of gaseous hydrocarbons, primarily methane (95%), small amounts of higher alkanes, and traces of carbon dioxide and nitrogen, hydrogen sulfide and helium ...

demanded (for heating) in winter than in summer. In order to fairly value and manage the profitability of energy products it is thus necessary to capture these seasonal price dynamics in a forward curve term-structure. The contract duration of a

futures contract In finance, a futures contract (sometimes called futures) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The item tr ...

is limited by definition and

investor An investor is a person who allocates financial capital with the expectation of a future Return on capital, return (profit) or to gain an advantage (interest). Through this allocated capital the investor usually purchases some species of pr ...

s have to change their contract during the contract term. Price forward curves help to determine when to do that, two scenarios are possible: # If the PFC is ascending, i.e. future commodity-contracts will be more expensive than at the moment, this is called

contango Contango is a situation in which the futures contract, futures price (or forward contract, forward price) of a commodity is higher than the spot price. In a contango situation, arbitrageurs or speculators are "willing to pay more for a commodity ...

. The investor will have additional costs as they have to sell their futures to a lower price than what they have to invest for their new futures. # If the PFC is descending, it is a so-called

backwardation Normal backwardation, also sometimes called backwardation, is the market condition where the price of a commodity's forward contract, forward or futures contract is trading below the ''expected'' spot price at contract maturity. The resulting fu ...

and investors will make money by exchanging (''rolling'') their old

s to new ones.

Hourly price forward curve

An hourly price forward curve (HPFC) is the construction of a forward curve at a resolution exceeding that known to the market and is as such able to capture the seasonalities of the electricity spot prices. The construction of an HPFC can be based on the combination of two approaches. A statistical approach examines how spot prices have moved in the past. A fundamental model suggests that the price is set purely by supply and demand (respectively, fuel prices on the merit order curve, and load).

Forward interest rate

Price forward curve

Hourly price forward curve

References

Further reading