Stochastic simulation of Brazilian forward energy prices

Energy trading offers great gain opportunities but also exposure to risk due to price volatility. A proper price model is a key element of risk analysis by electricity market traders and represents a strong tool for providing a better understanding of market dynamics. Despite the existing methodologies, the agenda for new research development is still open, mainly considering specific regulatory conditions and the dynamics of energy markets under development. This work provides a technique to simulate stochastic forward price curves for the Brazilian energy market by using stochastic procedures widely used in the financial and stock markets. The results of this work conveniently represent the uncertainty in Brazilian energy market prices and can be applied in risk management and decision making.