Multi-factor forward curve models for energy risk management

In the second article of this series, Carlos Blanco and Michael Pierce introduce the most common multi-factor models of the forward curve used for energy derivatives pricing and risk measurement

crossing arrows - moving upwards

In energy markets, forward price changes over time are largely determined by new information regarding the expected average spot price during a future delivery window, and therefore their behaviour is substantially different from that exhibited by spot prices, which immediately react to short-term changes in the physical market.

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Forward curve behaviour

Some of the key

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