Caps

What is it?

A paper hedge agreement designed to protect you from rising prices, yet allows you to benefit from falling prices. Also known as "call option". It requires an upfront payment.

Here's an example of how it works

To begin, you and Global agree upon 

• the fuel volume
• an appropriate price index (such as Platts)
• a hedging period of 2 months (you pay fluctuating spot market fuel prices)
• an upfront cap premium 
• a fuel price cap level of $180 per tonne.
  

Month 1

The average monthly price per tonne was $172.50 ($7.50 below the cap level)

There is no settlement.

Month 2

Average monthly price per tonne was $187.50 ($7.50 above the cap level)

Global pays you $7.50 per tonne.  

Result

For the 2 months hedged:  $7.50 per tonne profit for you (minus upfront premium).

*At the end of each month, the amount to be paid (the settlement) is calculated -- based on the difference between the average daily Platts settle and the agreed cap level.

To recap

When the average monthly price settles below the cap level – there is no payment and you benefit from falling prices.