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Derivatives




Price Risk


The risk that arises because the price of an asset underlying a derivative is not known over the course of the period between contract date/ value date and expiration date. This risk would cause losses to a party or counterparty to a derivative contract. For example, the holder of an option contract would be exposed to a price risk embodied in any unfavorable changes in the price of its underlying asset before expiration date. For an option, price risk impacts exercise: the holder would refrain from exercise should the option be at-the-money or out-of-the-money.

For a commodity derivative, price risk (known as commodity price risk) is the probability that commodity prices will change in a way that results in economic losses to a party. Commodity price risk for buyers reflects increases in commodity prices, while for sellers/ producers it represents decreases in commodity prices.



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Derivatives have increasingly become very important tools in finance over the last three decades. Many different types of derivatives are now traded actively on ...
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