Zero Cost Collar

Zero Cost Collar is a paper hedge agreement designed to keep your fuel prices within an agreed price range. Also known as cap and floor.

Zero Cost Collar

Three good reasons to use this strategy

  • Rising fuel prices would seriously undermine your business
  • You would like to benefit from falling prices after having fixed your maximum fuel prices
  • You would rather establish a floor level than pay an upfront cap premium

Benefits

  • Protection from price increases
  • Flexibility in physical supply
  • No upfront premium

Disadvantages

  • Opportunity loss when prices fall
  • Potential basis risk
  • Margin calls

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