BUSINESS AREAS
No matter what industry you are part of, you still need to secure your budgets from getting out of hand...
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Caps
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:
- the monthly volume
- an official fuel price index (Platts/Argus)
- a hedging period (e.g. 2 months)
- a Cap Price (e.g. 110 per tonne)
- an upfront payable insurance premium
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:
- Rising fuel prices would seriously undermine your business
- You would like to benefit from falling prices after having fixed your maximum fuel prices
| Benefits | Disadvantages |
| Protection from price increases | Premium upfront |
| Benefit from falling fuel prices | Potentially some basis risk |
| Flexibility in physical supply |
