A collar (a combination of a call option and a put option) is a financial instrument designed to hedge your fuel exposure by locking prices into a certain range. These products are often traded at zero upfront cost. However, depending upon the exact structure, a premium may be received.
- 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 call strike price)
- Select price floor level (or put strike price)
Fuel price moves the price floor level (red zone). You make a cash payment to your trading counterparty but this is offset by the lower physical fuel prices you pay in the market. You will benefit from falling prices until the floor is passed.
Fuel prices remain between cap and floor levels (unshaded zone). There are no further cash payments or receipts. Physical fuel is purchased in the market and you are exposed to price fluctuations within your predefined range.
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. You will be exposed to rising fuel prices until the cap is passed.