Glossary term
Forward Curve
A forward curve is a series of prices or rates for future delivery dates or maturities, showing what the market currently implies across time.
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What Is a Forward Curve?
A forward curve is a series of prices or rates for future delivery dates or maturities. It shows what the market currently implies across time for a commodity, currency, interest rate, or other underlying asset.
Forward curves are used for pricing, hedging, valuation, and market interpretation. They help answer not only what something costs today, but what the market is pricing for future dates.
Key Takeaways
- A forward curve plots forward prices or rates across future dates.
- It can apply to commodities, interest rates, currencies, and other markets.
- The curve can slope upward, downward, or change shape across maturities.
- Forward curves are used for hedging, valuation, budgeting, and risk management.
- The curve is a market-implied pricing structure, not a guaranteed forecast.
How a Forward Curve Works
In commodities, a forward curve may show the price for delivery next month, in six months, and in a year. In rates, it may show implied future interest rates. In currencies, it may show forward exchange rates across settlement dates.
The curve is built from traded prices, forward contracts, futures contracts, swaps, or pricing models, depending on the market. More liquid points are usually more reliable than thinly traded maturities.
Contango and Backwardation
Curve shape | Meaning |
|---|---|
Contango | Later-dated prices are higher than near-dated prices. |
Backwardation | Later-dated prices are lower than near-dated prices. |
Flat curve | Prices or rates are similar across maturities. |
How It Is Used
A producer may use the forward curve to decide whether future sale prices support locking in revenue. A buyer may use it to budget future input costs. A portfolio manager may use an interest-rate curve to value bonds or derivatives.
The curve can also signal market stress. A steep commodity backwardation may point to tight near-term supply. A sharply shifting rate curve may reflect changing monetary policy expectations.
Example
If spot natural gas is $3.00, next winter delivery is $4.00, and the following spring is $3.40, the forward curve is telling a seasonal story. Buyers may be willing to pay more for winter delivery because demand is expected to be higher or storage is more valuable. A company planning future purchases can use that curve for budgeting, even though actual future prices may differ.
Forward curves can also shift quickly. A supply disruption, inventory report, or policy change can move the entire curve or only certain maturities.
Forward curves are also used to mark existing contracts to market. If a company has a hedge or supply contract tied to future prices, changes in the curve can affect reported value, collateral needs, and risk limits even before any physical delivery occurs.
The Bottom Line
A forward curve shows market-implied prices or rates across future dates. It is a useful map for hedging and valuation, but it should be interpreted as current market pricing rather than a promise about the future.