Options in Hedging Applications
Energy “options” go one step further than an OTC fixed-for-floating swap contract. They can be compared to insurance policies, because there is a premium to pay but if the market moves against you there is no requirement to pay any more money. In the same way, the purchaser of an energy option is buying the right to claim price protection (or benefit as a trader) from the seller of the option if the price of the chosen energy market rises above the price specified in the contract (called the “strike price”).
KeywordsPrice Reference Option Strategy Energy Market Strike Price Barrier Option
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