A derivative instrument/ contract whose value is based on, or derived from, the price movement of a commodity such as oil, metals, agricultural products, minerals, etc. Other assets such as freight rates, emissions trading credits, and even weather conditions, can also be used as underlying in commodity derivatives. Like any breed of derivatives, commodity derivatives comprise the four basic derivatives, and hence there exist commodity options, commodity swaps, and commodity futures /forwards.
Commodity derivatives market provides hedging tools for companies whose business depends on a given commodity. For example, airlines hedge their operations against fluctuations in fuel prices, mining corporations hedge against declines in metal values and utilities like power companies hedge against rises in the price of natural gas.
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