Use of Options in Commodity Hedges

Abstract

Although options first arose from the commodities markets, it is financial market applications which have been the dominant feature of the last two decades: financial risks are more obviously multifarious in nature, and the option is now widely seen as an additional and powerful tool for the hedger. However, it would be inaccurate to characterise participants in commodities markets as unsophisticated in terms of risk management procedures. Although starting from a low base, the volumes of London’s exchange traded commodity options, particularly those relating to the energy markets, have been steadily increasing.