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Derivatives primer - Determining a Forward Price for a storable commodity - Natural Gas, Crude Oil, LNG. Electricity?

A Quantitative approach for Petrobras (Brazil - Emerging Markets) in Endur, Allegro, Sungard Energy, Triple Point and
Energy Trading Risk Management Systems

                        Forward Price at time T                            Forward date


                        Spot Price at time t                               Spot date


                        Risk free Interest Rate                            IR


                        Cost of Carry                                      Storable commodity only


                        Convenience Yield                                  Price of fuel/Electricty price = Spark Spread


                        Forward date                                       Time in the future (in weeks)


                        Spot date                                          Current, not averaging prices


Electricity is not storable. Electricty generated in one time period cannot carry forward to the next. Future Spot prices do
not correlate to current Spot prices as specific influences will vary and differ, so cost of carry is not available for Electricity.
c. 2009 Phil Green, Derivatives Trading Desk®™
LNG. Electricity?

riple Point and




park Spread




re Spot prices do
able for Electricity.

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Forward Price Curve

  • 1. Derivatives primer - Determining a Forward Price for a storable commodity - Natural Gas, Crude Oil, LNG. Electricity? A Quantitative approach for Petrobras (Brazil - Emerging Markets) in Endur, Allegro, Sungard Energy, Triple Point and Energy Trading Risk Management Systems Forward Price at time T Forward date Spot Price at time t Spot date Risk free Interest Rate IR Cost of Carry Storable commodity only Convenience Yield Price of fuel/Electricty price = Spark Spread Forward date Time in the future (in weeks) Spot date Current, not averaging prices Electricity is not storable. Electricty generated in one time period cannot carry forward to the next. Future Spot prices do not correlate to current Spot prices as specific influences will vary and differ, so cost of carry is not available for Electricity. c. 2009 Phil Green, Derivatives Trading Desk®™
  • 2. LNG. Electricity? riple Point and park Spread re Spot prices do able for Electricity.