White Papers Importance of Price Curve Management In A More Reg | Page 2

INTRODUCTION
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:

1/ F
 inancial

statements – companies use forward
curves as inputs to derivative valuation models in
order to calculate the fair value of commodity in-

ventories or financial instruments that are carried
on the balance sheet (IFRS 13 and ASC 820).

2/ A
 sset Valuation – curves can be used to provide an

asset holder with an estimate of an asset’s current
and future value.

3/ R
 isk Management

and Reporting – a variety of
forward curve types will be used as a part of the
process of calculating risk metrics.

Indeed, given the above, it is fairly easy to begin to understand
that the forward curve is both a central and critical piece of data
used at the heart of all commodity-trading firms and across a
number of different areas of the business. A basic question
then, often asked by auditors and others, both internal and external, is how are the forward curves derived and maintained?

1) Managing Forward Curves in A Complex Market, ComTech Advisory White Paper, 2015
© Commodity Technology Advisory LLC, 2015, All Rights Reserved.