Learn the benefits of forward curves and how they are calculated.
How to create forward curve charts.
Forward Curves are sets of data which represent today’s market estimate of the price of a commodity at various points out into the future.
The most basic forward curves are generated by charting settlement prices for the various delivery months of a commodity quoted on a futures exchange such as the NYMEX. You can also plot forward curves based on the current market view of future prices on any day for the history of a commodity.
The forward curve represents the market’s best estimate of the future value of a commodity at any point in time. Most forward prices are generated by futures exchanges or by off-exchange or over-the-counter (OTC) trading at brokerage houses or specialist market makers. Typically, forward views of the value of a commodity are used as a tool to manage the risk of price exposure. Players lock in future prices to remove the uncertainty of price movement.
If you can visualize a forward curve at one point in time or especially the evolution of the forward view of the market, then you can:
Look for patterns, such as seasonality, that impact the curve at certain times every year.
See how closely the predicted curve follows the actual price outcome over time. You can do this by charting the actual spot price or, in the case of a futures, the settlement price of the first nearby contract, over a period of history and then selected forward curves during the same history, which will have their origin close to the spot price and either follow the spot price if the prediction was accurate or veer above or below the spot price if events turned out differently than expected.
In MIMIC, the forward curve is plotted as if the data was any other MIM database series. You can only plot series that are of the MIM type: “futures”. The application takes the future that you select and generates curve data as follows.
For every contract delivery month that quotes the future commodity, one value – the settlement (close) price is extracted from the database.
MIMIC reads the futures symbol for all the contracts associated with the commodity and determines the contract delivery month (e.g. NG_2002F would be January 2002 NYMEX Natural Gas Henry Hub).
The settlement price for the chosen day on each contract, going out into the future is then stored against the calendar days during the month of contract delivery. (NG_2002F delivered in January 2002 - its value is stored against the period January 1, 2002 until January 31st 2002. When charted, these prices fill in all the days of the month and look like steps joined by straight lines).
If the delivery month for a contract is still in the future, then the dates simply push forward into the future and the curve extends forward from the last actual data point. Normally, the last data points are today or yesterday. Forward curves can push the data range out several years into the future.