A cap (or call option) is a financial instrument (similar to an insurance contract) that protects your business from rising fuel prices while allowing you the flexibility to take advantage of falling prices.
- Select the most relevant contract (e.g. US Gulf Coast No.6 Fuel Oil 3%)
- Select volume of fuel to hedge
- Select time period
- Select price cap level (or strike price)
- Pay premium
Fuel price remains below cap level (unshaded zone). There are no further cash payments or receipts. Physical fuel is purchased in the market and you are able to take advantage of falling prices.
Fuel price rises above cap level (green zone). You receive cash from your trading counterparty to offset the higher physical fuel prices you must pay in the market.