How Forward Curve Tools Manage Higher Volatility and Illiquid Markets
In many markets, information concerning forward prices is not available, making the direct modeling of forward curves a difficult task. With derivatives usually written on forward contracts and based on average prices of forward contracts, it is difficult to obtain analytical expressions for forward curves. Because of recent price volatility, organizations are increasingly looking to new tools like ZEMA’s Curve Manager to help them attain a more flexible, reliable, and timely process for building pricing models.
The recent dramatic price movements have laid bare the risks inherent with being too heavily dependent upon Excel based systems to organize market data and calculate contract values. In current markets, the risk exposure of managing forward curves with Excel is huge due to the high potential for human error and an inability to process the data in a timely fashion. There is also a fundamental lack of transparency in systems built from Excel software. The contrast between this disjointed process and ZEMA’s Curve Manager could not be starker.
Curve Manager is an automated workflow engine designed to manage and simplify complex processes for building forward curves, which are normally built out of fragile spreadsheet systems. It enables companies to easily create curves, audit changes, apply access rights, validate curves, and map them to target systems. In fast-moving energy markets, many of which have pricing at or below the cost of production, the benefits of Curve Manager are numerous:
- Automates the collection of data inputs from external data providers across a wide range of brokers, exchanges, and ISO markets.
- Allows users to identify alternative data sources that may have had useful information for similar illiquid swap contracts.
- Stores all market prices in a centralized data center.
- Automates validation of all incoming market data.
- Allows users to mimic and reverse engineer an organization’s processes and business logic.
- Automates curve construction processes triggered by incoming data.
- Creates curve definitions, permissions, and mappings.
- Enables users to assign multiple processes for curve validation and staging.
- Interfaces with downstream systems, including internal publication systems and modeling tools.
- Retains all versions of price calculation methodologies.
- Automates extraction of prices on a daily basis.
In the current environment, organizations succeed by having the right information in the right hands at the right time. ZEMA’s Curve manager can provide organizations of all sizes with this advantage. To learn more, visit ze.com/the-zema-solution.