Cap
A cap is a financial tool that is designed to help you determine your maximum fuel price for future purchases while benefiting from a decrease in price.
You pay an initial premium which is dependent on the forward markets at the time. If the average price is higher than the capped price, we will pay you the difference between the average floating price and the agreed capped price for the fuel oil. This means that you buy a "right", but not an "obligation" to buy at the capped level.
Rewards
- Protection against rising markets
- Benefit from falling markets
- Flexibility in physical supply
Risks
- Upfront premium
- Basis risk in some cases
Cap example
In December you buy a cap for January and February fuel prices which means that you will never pay more than $520/mt. 2,000mt each month.
For this option you pay a $4/mt premium, a total premium $16,000.
In January the average settled at $515 which means that there is no settlement, and you just buy normally at spot prices. Therefore, you have a lost premium which has already been paid.
In February, the average settled at $529 so OW Bunker will pay you $18,000.
Your total profit during both months is $2,000. 
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