An option strategy, whereby the buyer of a corridor purchases a cap with a lower strike while selling a second cap with a higher strike. The premium earned from the sale of the second cap reduces the total cost of the corridor. The buyer is protected from rates rising above the first cap’s strike, but exposed again if they rise past the second cap’s strike. This liability can be limited by selling a knock-out cap, rather than a conventional cap.
Commodity trading and risk management is a subject that is necessarily complicated, and is becoming more so. The Energy Risk Glossary seeks to disentangle and clarify the jargon by providing definitions of commonly used energy and commodity market terms.
These include definitions related to a variety of underlying energy products, as well as technical terms about the many instruments and benchmarks used by energy market participants.
Many of the most recent terms to have been added to our glossary stem from the actions of regulators since the 2008 global financial crisis. The onset of rules, such as the US Dodd-Frank Act and European Market Infrastructure Regulation, has markedly increased the cost and complexity associated with commodity trading. Perhaps they have also increased the need for a handy reference guide such as this.
The glossary is extensively cross-referenced, making for easy and thorough searches. We hope you find the latest edition of the Energy Risk Glossary to be a useful resource.
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