White Papers The Importance of Real-Time Forward Curves | Page 5

The Importance of Real-Time Forward Curves
of different trading strategies, including cross-commod-
ity and intermarket plays. These strategies will often
include smaller, illiquid markets in which little reliable
price information or standardized forward price curves
exist. In these cases, it’s incumbent upon risk managers
to develop and derive forward curves based on analo-
gous markets and/or any number of factors, including
derived or estimated basis numbers that can be associ-
A ComTechAdvisory Whitepaper
ated with any appropriate and available exchange data.
In all such cases, the models and approaches utilized
to develop those curves must be transparent and con-
sistent within the context of the market to which they
are being applied; and, as these price curves will often
require external review and validation, the methods and
data used in their development must also be transpar-
ent and auditable.
FORWARD PRICE CURVES
As noted, price data is key to price risk management and valuation; however, prices come from
a wide number of different sources of variable quality, reliability and specificity to individual mar-
kets, including any number of trade intervals, units of measure and currency types. For example,
some sources may be real-time, such as intraday power markets, or they may lag actual trades by
days or even weeks, as is often the case in illiquid markets. Cross-border trading can introduce
differing currencies or units of measure, and the development of forward curves for those trans-
actions requires that FX curves be incorporated as well. Here, new price curves may be derived
using FX and UOM conversions.
When it comes to consuming price data, three things
are needed more than ever as a result of the changing
market conditions described in Section II above – au-
tomation, visualizations and real-time capabilities.
Leading data management tools can be used to col-
lect and verify price data. Combining rules-based au-
tomation with audit trails provides the ability to pro-
grammatically capture and transform prices while
maintaining a comprehensive log of any issues, ma-
nipulations, or omissions. Various rules or edits can
be specified and used to validate price data automat-
ically by the data management software identifying
and flagging potential data issues - for example, to
check that a price is within an acceptable range of
values. Manipulations and transformation can also be
automated to create derived curves or to ensure price
curves are calculated in the correct currency or unit of
measure. Without such tools, users are subject to the
risk of missing, erroneous or inaccurate data and/or
the need to manually construct derived curves using
insecure tools such as Excel. Furthermore, without a
programmatic approach, it will be significantly more
difficult and time-consuming to convince stakeholders
and others that the data is accurate and verified.
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