Commodity Derivative

Commodity derivatives include futures, forwards, options and swaps. They allow producers, consumers and investors to manage or take on exposure to commodity prices without necessarily handling the physical goods.

Producers use them to lock in selling prices, protecting against falls. Consumers lock in buying prices, protecting against rises. For example, an airline might buy oil futures or swaps to fix the price of a portion of its future fuel purchases, while a farmer might sell wheat futures to lock in a price before harvest.

Investors and speculators use commodity derivatives to gain exposure to commodity prices, diversify portfolios or profit from expected price movements. Many commodity funds hold futures rather than physical commodities.

Commodity derivatives are traded on exchanges, such as major futures exchanges in Chicago, New York and London, and over the counter. Prices can be very volatile, affected by weather, geopolitical events, supply disruptions and economic growth. Positions often involve leverage, magnifying gains and losses.