Application of Commodity Derivatives

Application of Commodity Derivatives

When there is good price convergence between a commodity derivative and the underlying physical, then the derivative is an excellent proxy for the underlying. In this video, Emma explains us how companies and investors deploy commodity forwards in their businesses.
Overview

Commodity derivatives can be used to create an exposure to a commodity or to hedge an existing commodity exposure. Examples illustrate how commodity derivatives can be used to profit from commodity price movements and transform the pricing characteristics of contracts for the purchase or sale of physical goods.

Key learning objectives:

  • Describe how an investor can use a commodity derivative to create an exposure which (a) generates a profit if the price of a commodity increases and (b) avoids taking delivery of the commodity

  • When would a physical market participant consider going through to physical settlement under a commodity derivative?

  • Describe how a physical market participant can use a commodity forward to transform the price of a floating (i.e. unknown) price physical contract to a fixed price

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