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
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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