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Basic Derivatives

In: Understanding Risk Management and Hedging in Oil Trading

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  • Chris Heilpern

Abstract

We have already defined derivatives, and those of you who want more formal, financial definitions can find them readily in any finance textbook or on the internet. For now, we will simply say that they are financial contracts whose settlement price is based on the price of an underlying physical market. The bets we made with our trader friend are derivatives; the bet was for 60,000 mt of Platts European diesel, but the bet was settled by paying in dollars, not by delivering physical oil. We only cared about the price, and the price of the bet was derived (taken from, calculated based on, etc.) from the price of physical cargoes of diesel published by Platts. We don’t generally call these “bets” since traders don’t like to be called gamblers, and shareholders don’t like the idea of some overpaid 25-year-old gambling with their money. We call these kinds of bets “derivatives and hedges.”

Suggested Citation

  • Chris Heilpern, 2023. "Basic Derivatives," Springer Books, in: Understanding Risk Management and Hedging in Oil Trading, chapter 0, pages 95-112, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-44465-4_8
    DOI: 10.1007/978-3-031-44465-4_8
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