About | HeinOnline Law Journal Library | HeinOnline Law Journal Library | HeinOnline
LOG IN
LOG IN

Primer on Energy Derivatives and Their Regulation , Record No.: RS22918, July 15, 2008 1 (July 15, 2008)

handle is hein.tera/crser0087 and id is 1 raw text is: Order Code RS22918 July 15, 2008 A CRS Report for Congress Primer on Energy Derivatives and Their Regulation Mark Jickling Specialist in Financial Economics Government and Finance Division Summary Prices for oil and other energy commodities are set in futures and derivatives markets, where producers, commercial users, and financial speculators buy and sell contracts whose value is linked to the price of the underlying commodity. Trading occurs on regulated futures exchanges and in a largely unregulated over-the-counter (OTC) market; both forms of trading are global in scope. This report presents basic information about these markets, the instruments traded, the regulatory framework, speculation, and current legislative proposals. The report will be updated as warranted. Derivative financial contracts gain or lose value as the price of some underlying commodity, financial indicator, or other variable changes. In essence, traders promise to buy or sell a commodity in the future at today's price. The terms of derivative contracts - which include futures contracts, options, and swaps - may be simple or complex, but all involve two parties, one of whom stands to gain if prices rise, the other if they fall. Thus, futures markets are zero-sum - any change in the price of the underlying commodity generates profits for some traders, and an equal amount of losses for the rest. Benefits of Derivatives Trading: Hedging and Price Discovery It is not inaccurate to describe derivatives as bets on the direction of future price trends. Questions then arise: what separates the market from gambling? What public interest is served by the activity? There are two recognized benefits to derivatives trading: hedging and price discovery. Hedgers are traders who use the market to avoid price risk arising from their commercial dealings in the underlying commodity. An oil producer, for example, can use the markets to lock in today's price for future sales of physical oil, obtaining protection against the risk of falling prices. The producer will purchase contracts that gain value if the price of oil falls. If the price does in fact drop by the time the futures position expires, the producer will lose money on physical sales, but the loss will be offset by futures Congressional Research Service The Library of Congress Prepared for Members and Committees of Congress

What Is HeinOnline?

HeinOnline is a subscription-based resource containing thousands of academic and legal journals from inception; complete coverage of government documents such as U.S. Statutes at Large, U.S. Code, Federal Register, Code of Federal Regulations, U.S. Reports, and much more. Documents are image-based, fully searchable PDFs with the authority of print combined with the accessibility of a user-friendly and powerful database. For more information, request a quote or trial for your organization below.



Short-term subscription options include 24 hours, 48 hours, or 1 week to HeinOnline.

Purchase Access

Contact us for annual subscription options:

Contact Us

Already a HeinOnline Subscriber?

Log In

profiles profiles most