FORWARD CURVE Meaning and
Definition
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The term "forward curve" refers to a graphical representation of the projected prices or rates of a financial instrument, such as a commodity, bond, or currency, over a specified period of time in the future. It is a key tool for assessing future market expectations and risks. The forward curve is typically constructed using a series of future contract prices or swap rates, which are then plotted against their respective maturities.
The forward curve provides valuable insights into market sentiment and expectations as it offers a snapshot of the prevailing market view regarding the future direction of prices or rates. Traders, analysts, and investors use the forward curve to analyze and predict future market movements, manage risk, and make informed decisions. It enables them to assess the market's outlook for prices or rates, to identify possible price discrepancies, and to forecast future levels and trends.
The shape of the forward curve can vary, indicating different market conditions and expectations. It can take the form of a "normal" curve, where prices or rates increase gradually with longer maturities, or an "inverted" curve, where short-term prices or rates are higher than long-term ones. Flat or humped curves are also possible, reflecting market uncertainties or changing expectations. Understanding the dynamics and interpreting the forward curve is crucial for informed decision-making and risk management in various industries, including financial markets, energy, commodities, and foreign exchange.
Etymology of FORWARD CURVE
The word "forward curve" is composed of two parts: "forward" and "curve".
The term "forward" is derived from the Old English word "foreweard" which means "toward the front" or "in advance". It is a combination of "fore", meaning "before", and "weard", meaning "ward" or "direction". Over time, this word evolved to its present form and came to be used to indicate something that is ahead in time, place, or position.
The word "curve" originates from the Latin word "curvus" which means "bent" or "curved". This Latin term made its way into Middle English as "curven", and eventually, "curve". It refers to a line that is not straight but instead bends, arches, or deviates from a straight path.
