What Is a Commodity Derivative and How Is It Used?

A commodity derivative is a financial instrument whose value is derived from the price of an underlying commodity, such as oil, gold, or agricultural products. These instruments, which include futures, forwards, and options, are used primarily for two purposes: hedging and speculation.

Producers and consumers use them to hedge against adverse price fluctuations, locking in a future price. Speculators use them to profit from anticipated price movements without having to physically handle the underlying commodity.