How to gain from risk premia


An energy firm asks Joe Risk Manager to forecast the earnings for the natural gas trading book. To determine these figures, Joe needs some prediction of future gas prices. But he has no idea where to get them. So he asks the head trader and the head quantitative analyst.

“The forward curve is the best predictor of spot prices,” is the trader’s advice. But the quant says the current spot price adjusted for seasonality and mean reversion would be the best predictor. Given this somewhat

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