Chapter 5Forward Prices

Obtaining a fair price is important to the success of any energy trading or investing strategy. Fair prices are prices that allow neither buyer nor seller a risk-free profit at the expense of the other trader. This is a mathematical constraint on prices that defines a fair price in relation to other prices. Defining fair prices in this way allows investors to move away from opinions and benefit from a concrete way to measure fairness.

In cases where there are active trading markets, the market can usually be relied upon to give a fair price. However, a large number of energy markets don’t experience active trading. As a ...

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