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A cap allows you to set a maximum (or strike) price you'll pay on the maturity date for an agreed notional quantity of a commodity, while also allowing you to participate in price falls below the strike price.
A cap is sometimes referred to as a call.
Benefits
- Assists you in protecting against adverse commodity price movements.
- Allows you the opportunity to benefit from price falls below the fixed (strike) price by transacting at the prevailing market price.
- Provide protection against the commodity price rising.
Points to consider
- A premium is normally paid at the commencement of the option.
- The premium is still payable if the option is not exercised.
Who might need it?
If you’re a consumer with uncertainty about the volume of your physical consumption or you want to manage the risk of a commodity price rise.
You may also be a consumer who’s looking for price protection for a known, upfront cost that allows you to participate in favourable price movements.
Example 1
On the maturity date, if the CRP (Commodity Reference Price) exceeds the strike price, NAB will pay you the cash settlement amount on the settlement date.
- Commodity Strike Price = $100 per tonne.
- CRP at maturity = $120 per tonne.
- NAB will pay you = $20 per tonne.
Example 2
If the CRP at maturity is the same or less than the strike price, no cash settlement amount is payable by either party.
- Commodity Strike Price = $100 per tonne.
- CRP at maturity = $80 per tonne.
- Settlement amount = $0.
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A floor allows you to set a minimum (or strike) price on the maturity date for an agreed notional quantity of a commodity, while also allowing you to participate in price rises above the strike price.
A floor is sometimes referred to as a put.
Benefits
- Assists you in protecting against adverse commodity price movements.
- Allows you the opportunity to benefit from price rises above the fixed (or strike) price by transacting at the prevailing market price.
- Provides protection against the price falling below the strike.
Points to consider
- A premium is normally paid at the commencement of the option.
- The premium is still payable if the option is not exercised.
Who might need it?
If you're a producer:
- with uncertainty about the volume of the physical production or you want to manage the risk of a commodity price fall, or
- looking for price protection at a known, upfront cost that also allows you to particpate in favourable price movements.
Example 1
On the maturity date, if the Commodity Reference Price (CRP) is less than the strike price, we'll pay you the cash settlement amount.
- Commodity Strike Price = $100 per tonne.
- CRP at maturity = $80 per tonne.
- NAB will pay you = $20 per tonne.
Example 2
If the Commodity Reference Price (CRP) at maturity is the same or more than the strike price, no cash settlement amount is payable be either party.
- Commodity Strike Price = $100 per tonne.
- CRP at maturity = $120 per tonne.
- Settlement amount = $0.
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A collar provides you with a known maximum (or strike) price (and minimum/strike price) on the maturity date for an agreed notional quantity of a commodity, while also allowing you to participate in price movements between these two prices.
Points to consider
- A premium is normally paid at the commencement of the option.
- Limits the benefit you can obtain from favourable price movements.
Who might need it?
- If you're a producer or consumer with uncertainty about the volume of your physical production or consumption; or wanting to limit the cost of your price protection.
- If you're a consumer and your intention is to manage the risk of a price rise by the maturity date.
- If you're a producer and your intention is to manage the risk of a price fall by the maturity date.
Example 1
The Commodity Reference Price (CRP) exceeds the maximum strike price, NAB will pay you the cash settlement amount (the difference).
- Maximum Strike Price = $110 per tonne
- CRP at maturity = $130 per tonne
- NAB pays you = $20 per tonne
Example 2
The Commodity Reference Price (CRP) is above the maximum strike price, you pay NAB the cash settlement amount (the difference).
- Maximum Strike Price = $110 per tonne
- CRP at maturity = $130 per tonne
- You pay the NAB = $20 per tonne
Example 3
The Commodity Reference Price (CRP) is below the maximum strike price and above the minimum strike price, no amount is payable by either party.
- Minimum Strike Price = $90 per tonne
- Maximum Strike Price = $110 per tonne
- CRP at maturity between = $90 and $110 per tonne
- Cash settlement = $0
Any advice on this webpage does not take into account your objectives, financial situation or needs and you should consider whether it is appropriate for you. Before making any decision in relation to this information, you should consider the Product Disclosure Statement available at Financial Markets or by calling 1800 307 827. The products on this webpage are issued by National Australia Bank Limited ABN 12 004 044 937 AFSL 230686.
Please consider our Financial Services Guide.
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The information provided on this page is intended to be of a general nature only. It has been prepared without taking into account your objectives, financial situation or needs. Examples are for illustrative purposes only. Before acting on the information on this website, National Australia Bank Limited (ABN 12 004 044 937, AFSL and Australian Credit License 230686) (NAB) recommends you consider whether it is appropriate for your objectives, financial situation and needs. NAB recommends that you seek independent advice before acting on any information on this webpage.
Target Market Determinations for these products are available at nab.com.au/TMD.