OIL INVENTORY REPORTS
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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.
Zero Cost Collar is a paper hedge agreement designed to keep your energy prices within an agreed price range. Also known as cap and floor.
Here's an example of how it works
To begin, you and Global agree upon:
Month 1
Monthly average settles at 110 per metric tonne (10 above the Cap Price. Global pays you 10 per tonne in cash, compensating you for the increase in spot prices.
Month 2
Monthly average settles at 95 per metric tonne - i.e. between the Cap and Floor Prices. There is no settlement, and you will be exposed to the changes in spot prices within this range.
Month 3
Monthly average settles at 95 per metric tonne (5 below the Cap Price). You pay Global 5 per tonne in cash, which counterbalances the lower spot prices.
Result
Protection against increasing prices, yet benefit from some decline in energy prices until the Floor Price is exceeded.
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 or Floor Price.
Three good reasons to use this strategy:
Benefits | Disadvantages |
Protection from price increases | Opportunity loss when prices fall |
Flexibility in physical supply | Potential basis risk |
No upfront premium | Margin calls |
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