Energy Derivatives

AAA

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.

INVESTOPEDIA EXPLAINS '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. Speculator

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

    A relatively new form of derivative contract (the first ones ...
  3. Derivative

    A security whose price is dependent upon or derived from one ...
  4. Equity Derivative

    A derivative instrument with underlying assets based on equity ...
  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 ...
RELATED FAQS
  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 >>
Related Articles
  1. Active Trading

    Uncovering Oil And Gas Futures

    Find out how to stay on top of data reports that could cause volatility in oil and gas markets.
  2. Options & Futures

    Are Derivatives A Disaster Waiting To Happen?

    They've contributed to some major market scandals, but these instruments aren't all bad.
  3. Options & Futures

    Fueling Futures In The Energy Market

    The energy market influences every aspect of our lives, and these four options are its driving force.
  4. Active Trading

    How Companies Use Derivatives To Hedge Risk

    Derivatives can reduce the risks associated with changes in foreign exchange rates, interest rates and commodity prices.
  5. Insurance

    Futures Fundamentals

    For those who are new to futures but want a solid understanding of them, this tutorial explains what futures contracts are, how they work and why investors use them.
  6. Mutual Funds & ETFs

    Want to Go Long Natural Gas? Eye the UGAZ ETN

    Is UGAZ the best way to play natural gas? Maybe not.
  7. Economics

    Oil Investments Boost Egypt's Recovery Prospects

    Major foreign oil companies have provided a big boost to the Egyptian economy by agreeing to invest around US$17 billion in the country's energy sector.
  8. Mutual Funds & ETFs

    Take Advantage of Cheap Oil, Invest in these ETFs

    With crude oil prices at record lows, investors should consider oil ETFs over oil company stocks as ETFs more closely mirror the price of oil
  9. Options & Futures

    Examples Of Exchange-Traded Derivatives

    We look at some of the most common exchange-traded derivatives.
  10. Options & Futures

    Advantages Of Trading Futures Over Stocks

    We look at the top eight advantages of trading futures over stocks.

You May Also Like

Hot Definitions
  1. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  2. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  3. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  4. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  5. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
  6. Absorption Costing

    A managerial accounting cost method of expensing all costs associated with manufacturing a particular product. Absorption ...
Trading Center