Retail Margin Enhancement
Generally, during periods of increasing prices, margins decline – and during periods of declining prices, margins increase. It is not the absolute price level, but rapid moves in the market that causes this change in margin. The Retail Margin Enhancement/Protection program is a structured transaction where the decision on when and how to enter and exit the transactions have been determined in advance. The number of gallons to be hedged is based off a customer’s monthly anticipated retail sales.
The Retail Margin Enhancement/Protection program is the purchase of a NYMEX, an over-the-counter “cap” (call option) at a strike price that requires approximately 3 cents in premium. As the market goes higher, the cap will gain in value, at a rate slower than the market is going up to hedge shrinking retail street margins. As wholesale prices decrease, retailers back into wider street margins while their capped hedge decreases in value (with the risk only being the initial premium cost). The maximum this trade can lose is only the 3 cent premium paid for the transaction (which is required up-front). Trades will be placed at the beginning of each month for all participating customers based on the gallons each customer has assigned to the program.
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