Energy Derivatives Markets: On-Exchange and Off-Exchange

Abstract

Derivatives normally make the headlines for all the wrong reasons. In the public mind, they are often associated with the activities of greedy speculators or with highly publicised corporate financial disasters. This is ironic because derivatives are essentially instruments to manage and reduce risk. They were created to provide opportunities to minimise price risk and to lock in profits, while reducing balance sheet volatility and the potential for losses. It is true that there have been cases in which the use of derivatives has led to spectacular losses, but this has normally been the result of their mistaken misuse or outright abuse by incompetent or ruthless individuals. Certainly, in the normal course of business life, derivatives are a prudent and, indeed, indispensable tool of price risk management.