forward curve or forward strip on that particular day.

For a given commodity on any trading day several futures contracts will exist with varying maturity dates.

once electricity is produced it must be used or it will go to waste. Demand is not constant.

Price is set by supply and demand - arbitrage opportunities do not exist (not possible to buy electricity during one season and sell during the next) so prices will vary much more during the trading day than financial futures.

- buying the commodity (using borrowed money),

- selling a futures contract for the commodity at the current futures price

- storing/holding it, selling it at the futures price when the contract expires.

- paying back the borrowed money

If the futures contract is overpriced this process will generate a riskless profit. The futures contract is overpriced if the actual market price is greater than the no-arbitrage price.

execute a reverse cash and carry arbitrage if the futures contract is underpriced relative to the non-arbitrage price.

reverse cash and carry consists of:

- selling the commodity short

- lend short sale proceeds at market interest rates.

- buy futures contract at market price

after 1 year (when contract expires)

- collect the loan proceeds

- take delivery of the commodity for the futures price and cover the short sale commitment.

F_0,T = S₀e^{(r + λ - c)T}

r = risk free rate

lambda = costs (such as storage costs)

c = benefts to buying the commodity today (convenience yield, lease rates, etc)