The holder of a corridor option receives a coupon at maturity, the magnitude of which depends on the behaviour of a specified spot rate during the lifetime of the corridor. For each day on which the spot rate (typically an official fixing rate) remains within the chosen spot range (the accrual corridor), the holder accrues one day’s worth of coupon interest. A variation is the knock-out corridor option. In this structure, the holder ceases to accrue coupon interest as soon as the spot rate leaves the range. Even if the spot rate subsequently re-enters the range, the holder does not continue to accrue coupon interest.
A wall option is a special type of corridor option, where the accrual corridor is one-sided. Another relative is the range binary, a digital option that pays a fixed-coupon amount if the rate stays within the range, but pays nothing if the range is breached.
* see alsorange binary; trigger condition
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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