Derivatives in Commodities: Understanding Commodity Derivatives with Emphasis on Natural Gas

Commodities are a fundamental part of economic activity which exhibit unique characteristics driven by physical supply constraints, geopolitical factors, weather patterns, and evolving demand structures, leading to price volatility. They are the fundamental building blocks of the global economy, are subject to unique supply and demand dynamics, geopolitical influences, and inherent price volatility.

Some examples include grains like corn, precious metals like gold and more but we are specifically focusing on natural gas which is an energy source under commodi- ties vital to energy security, industrial processes, and the ongoing energy transition especially with global initiatives like Net Zero 2050. This highlights for example an increased strategic importance of liquefied natural gas (LNG) within Europe, especially following recent geopolitical shifts.

Derivative markets which include futures, options, swaps and other instruments, have evolved as essential tools for market participants to manage risk (hedging), enhance price discovery and enable speculative positioning.

The objectives of this report are to provide a foundational understanding of commodity markets, their significance in the global economy, and the specific characteristics of the natural gas market before we explore the mechanics and applications of various derivative instruments commonly used in the natural gas market.

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See the full report in the link below!

BSAMC_Derivatives_Report_26_April_2025.pdf

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Credits:

Simone Vittorio Percoco (Team Leader)

Jo Lu (Analyst)

Ghita Karaouy (Analyst)

Matteo Chimenti (Analyst)

Matteo Brusasco (Analyst)

Luigi Falini (Analyst)

Stefano Chiapparini (Analyst)

Filippo Caselli (Analyst)