Energy Derivatives


DEFINITION of 'Energy Derivatives'

A derivative instrument in which the underlying asset is based on energy products including oil, natural gas and electricity, which trade either on an exchange or over-the-counter. Energy derivatives can be options, futures or swap agreements, among others. The value of a derivative will vary based on the changes of the price of the underlying energy product.

BREAKING DOWN 'Energy Derivatives'

Energy derivatives can be used for both speculation and hedging purposes. Companies, whether they sell or just use energy, can buy or sell energy derivatives to hedge against fluctuations in the movement of underlying energy prices. Speculators can use derivatives to profit from the changes in the underlying price and can amplify those profits through the use of leverage.

  1. Derivative

    A security with a price that is dependent upon or derived from ...
  2. Speculator

    A person who trades derivatives, commodities, bonds, equities ...
  3. Economic Derivative

    A relatively new form of derivative contract (the first ones ...
  4. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  5. Price Swap Derivative

    A derivative transaction in which one party guarantees a fixed ...
  6. Underlying

    1. In derivatives, the security that must be delivered when a ...
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  1. How are futures used to hedge a position?

    Futures contracts are one of the most common derivatives used to hedge risk. A futures contract is as an arrangement between ... Read Full Answer >>
  2. How do hedge funds use equity options?

    With the growth in the size and number of hedge funds over the past decade, the interest in how these funds go about generating ... Read Full Answer >>
  3. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  4. Can mutual funds invest in commodities?

    Mutual funds can invest in commodities. In fact, mutual funds may provide a better way for investors to gain exposure to ... Read Full Answer >>
  5. How do futures contracts roll over?

    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>
  6. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>

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