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 trades 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.

RELATED TERMS
  1. Underlying Option Security

    An underlying option security is the financial instrument on ...
  2. Exchange Traded Derivative

    A financial instrument whose value is based on the value of another ...
  3. Derivative Product Company - DPC

    A special-purpose entity created to be a counter-party to financial ...
  4. Derivative

    A security with a price that is dependent upon or derived from ...
  5. Equity Derivative

    A derivative instrument with underlying assets based on equity ...
  6. Derivatives Time Bomb

    A possibile situation where the financial markets plunge into ...
Related Articles
  1. Trading

    Derivatives 101

    A derivative investment is one in which the investor does not own the underlying asset, but instead bets on the asset’s price movement with another party.
  2. Trading

    What Is A Derivative?

    A derivative is a security whose price is dependent upon or derived from one or more underlying assets. Learn more on how investors can use this financial instrument in their trading strategies.
  3. Investing

    Derivatives 101

    Learn how to use this type of investment as an alternative way to participate in the market.
  4. Markets

    The US Is Becoming More Energy Independent

    Rising production and abundant shale oil and gas reserves are moving the US towards energy independence, which could happen by 2020
  5. ETFs & Mutual Funds

    VDE: Vanguard Energy ETF

    Discover the type of investment strategy the Vanguard Energy ETF follows, and learn why it may be an appropriate addition to an investor's portfolio.
  6. Trading

    Warrants

    Learn more about this derivative security.
  7. Trading

    Futures, Derivatives and Liquidity: More or Less Risky?

    Futures and derivatives get a bad rap after the 2008 financial crisis, but these instruments are meant to mitigate market risk.
  8. ETFs & Mutual Funds

    The Top 6 ETFs For Investing in Energy (VDE, XOM)

    Find out which energy sector ETFs may be poised for a big future, including options for investors who want clean energy, more diversity or lower expenses.
  9. Financial Advisor

    SEC Derivatives Rule May Limit Diversification

    The SEC has proposed rules that will limit the use of derivatives by fund managers. Critics believe the rules will impede funds' ability to diversify.
  10. ETFs & Mutual Funds

    Where And How To Trade Energy Stocks

    Energy futures set a high bar to entry for individual traders and investors, redirecting exposure into sector equities and exchange-traded funds.
RELATED FAQS
  1. Can mutual funds invest in derivatives?

    Find out about mutual fund investment options, and understand whether mutual funds are permitted to include investments in ... Read Answer >>
  2. How big is the derivatives market?

    Examine the potential size of the total derivatives market, and learn how different calculations can reduce the estimate ... Read Answer >>
  3. What expiry months are typically available for derivatives?

    Discover more about the derivatives market and learn about the varying expiration months for derivatives in different financial ... Read Answer >>
  4. What is the difference between derivatives and swaps?

    Find out more about derivative securities, swaps, examples of derivatives and swaps, and the main difference between derivative ... Read Answer >>
  5. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Answer >>
  6. What is the difference between derivatives and options?

    Learn how options are one type of derivative and how equity options derive their value from a stock, and understand other ... Read Answer >>
Hot Definitions
  1. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  2. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  3. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  4. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  5. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  6. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
Trading Center