In an era of significantly tighter regulation and oversight of commodity markets, forward price curves have taken on a whole new level of importance. Internal and external auditors, as well as regulators, want to be certain that the valuations used to build up financial statements are irrefutable and truly represent fair value based on reliable data. Indeed, several of the regulations now in force also call for increased and better documented risk management processes, including mark-to-market and profit and loss calculations.
Increasingly, funding banks and shareholders also desire increased transparency into risk management for assurances and forward price curves are central to that function. No matter how good the risk management systems are, it is the data that they utilize that is key to good risk management, and market pricing is a key ingredient in that data. Furthermore, the forward curve requirements don’t just impact commodity trading and hedging operations, but also the treasury function.
In a previous paper1, Commodity Technology Advisory defined forward curves and looked at their uses and the source of the forward curve data in some detail. In essence, forward curves have three major uses.
Read the document online or download it from the CTRM Center Importance of Price Curve Management In A More Regulated Commodity Trading Environment