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 (OTC). 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.
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.
An Exchange Traded Derivative is financial instrument whose value is based on the value of another asset, and that trades on a regulated exchange. Exchange traded derivatives have become increasingly popular because of the advantages they have over over-the-counter (OTC) derivatives.
Advantages such as:
Elimination of Default Risk.