Risk Management in the Energy Sector: The Impact of Derivatives on Price Volatility, Operational Resilience, and Sustainable Transition

Risk Management in the Energy Sector: The Impact of   Derivatives on Price Volatility, Operational Resilience, and Sustainable Transition

Shivam

Abstract

The global energy sector faces a complex and volatile environment driven by fluctuating commodity prices, evolving regulatory landscapes, and a transformative shift toward sustainable energy. This thesis explores the strategic role of financial derivatives—futures, forwards, options, swaps, and emerging instruments like carbon credit derivatives—in managing the multifaceted risks inherent in the energy industry. Through a comprehensive analysis, it examines how derivatives mitigate price volatility, support operational continuity, and enable long-term financial planning across both traditional and renewable energy sub-sectors. The study highlights key risks such as counterparty default, funding liquidity crises, and regulatory uncertainty, emphasizing the importance of integrated, well-informed risk management frameworks. Drawing on real-world case studies, including the collapse of Metallgesellschaft AG, the research underscores how even sound hedging strategies can fail without adequate oversight and liquidity planning. Regulatory frameworks such as Dodd-Frank, MiFID II, and REMIT are analyzed for their influence on derivative usage and market stability. The study further explores the emerging convergence of environmental and financial regulation, particularly in carbon and ESG-linked derivatives. The findings lead to strategic recommendations for energy firms and policymakers to optimize risk management through holistic, proactive, and technology-enabled approaches, positioning derivatives not only as tools of risk transfer but also as facilitators of sustainable energy transition.