BUSINESS AREAS
No matter what industry you are part of, you still need to secure your budgets from getting out of hand...
Read moreKeeping energy costs within a predictable range protects you from unexpected changes in the price of energy. Changes that could otherwise seriously impact your budget and profit margin.
A Cap is a paper hedge agreement designed to protect you from rising prices, yet allows you to benefit from falling prices. Also known as "call option".
Here's an example of how it works
To begin, you and Global agree upon:
Month 1
Monthly average settles at 95 per petric tonne (15 below the cap level). There is no settlement of the Cap, so you will take advantage of the lower spot prices.
Month 2
Monthly average settles at 125 per metric tonne (15 above the cap level). Global pays you 15 per metric tonne in cash, compensating you for the increase in spot prices.
Result
Protection against increasing prices, yet benefit from falling prices.
Maximum payment from you to Global is the insurance premium.
At the end of each calendar month, the settlement amount is based on the difference between the monthly average of the price index and the Cap Price.
Two good reasons to use this strategy:
Benefits | Disadvantages |
Protection from price increases | Premium upfront |
Benefit from falling fuel prices | Potentially some basis risk |
Flexibility in physical supply |
You may also be interested in
No matter what industry you are part of, you still need to secure your budgets from getting out of hand...
Read moreGlobal Risk Management is a group of companies, all belonging to the same ultimate owner...
Read moreFollow recent developments at Global Risk Management. Receive our short e-mail newsletter covering items...
Read more Contact