What is it?
A paper hedge agreement designed to keep your fuel prices within an agreed price range. Also known as cap and floor. It requires no 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 3 months (you pay fluctuating spot market fuel prices)
- a maximum fuel price of $190 per tonne (the cap level) , and
- a minimum fuel price of $180 per tonne (the floor level).
Month 1
Average monthly price per tonne was $200 ($10 above the cap level)
Global pays you $10 per tonne at the end of the month.
Month 2
The average monthly price per tonne was $185 i.e. within the collar range.
There is no settlement at the end of the month.
Month 3
The average monthly price per tonne was $175 ($5 below the cap level)
You pay Global $5 per tonne at the end of the month.
Result
$5 per tonne profit for you over the 3 month hedging period.
*At the end of each month, the amount paid (the settlement) was calculated on the difference between the average daily Platts settle and the agreed cap and floor levels.
To recap
When the average monthly price settles
- above the cap level - Global pays you the difference at the end of the month
- below the floor level - you pay Global the difference at the end of the month
- between the floor and cap levels - there is no payment.
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