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UIDE TO
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EDGING
 
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Other Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38Example 12 – Effect of Basis on a Fuel Dealer’s Hedge . . . . . . . . . . . . . . . . . . . .41Exchange of Futures for Physicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42Mechanics of an EFP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43Example 13 – Use of an EFP to Initiate a Position . . . . . . . . . . . . . . . . . . . . . . . .44Example 14 – Use of an EFP to Liquidate a Position . . . . . . . . . . . . . . . . . . . . . .44Blind vs. Selective Hedge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46Technical Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46Charting Price Trend Lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47Volume and Open Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48
Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50
Determinants of an Options Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51Strike Price vs. Futures Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51Time Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52Call/Put Parity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54Example 15 – Setting a “Cap” on Gasoline Prices by Buying Calls . . . . . . . . . . . .54Example 16 – Setting a “Floor” Against a Gasoline Price Declineby Buying Puts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55Example 17 – Purchasing an Out-of-the-Money Call to CapNatural Gas Prices in a Potential High-Volatility Market . . . . . . . . . . . . . . . .56Example 18 – Hedging Against a Natural Gas Price Decline ina Potential High-Volatility Market with Out-of-the-Money Puts . . . . . . . . . .57Collars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58Example 19 – An Industrial Gas Consumer Uses a Collar to HedgeGas Prices at an Affordable Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58Example 20 – Setting a Floor With Crack Spread Options . . . . . . . . . . . . . . . . . .59Example 21 – Writing a Call Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60Example 22 – Creating a Fence With Crack Spread Options . . . . . . . . . . . . . . . .61Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62
Exchange Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63
 
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S
ignificant, sometimes abrupt, changes in supply, demand, and pricing have touchedmany of the world’s commodity markets during the past 25 years, especially those forenergy. International politics, war, changing economic patterns, and structural changeswithin the energy industry have created considerable uncertainty as to the future directionof market conditions. Uncertainty, in turn, leads to market volatility, and the need for aneffective means to hedge the risk of adverse price exposure.The principal risk management instruments available to participants in the energy mar-kets today are the versatile futures and options contracts listed on the New York MercantileExchange. The contracts are designed to meet the needs of the modern energy industry byencompassing the standards and practices of a broad cross-section of the trade.The Exchange is the world’s largest physical commodity futures exchange. Trading isconducted through two divisions: the NYMEX Division offers futures and options contractsfor light, sweet crude oil; heating oil; New York Harbor gasoline; natural gas; electricity; andplatinum; futures for propane, palladium, sour crude oil, Gulf Coast unleaded gasoline; andand options contracts on the price differentials between heating oil and crude oil, and NewYork Harbor gasoline and crude oil, which are known as crack spread options.The COMEX Division lists futures and options on gold, silver, copper, aluminum, andthe FTSE Eurotop 100
 ® 
European stock index; and futures for the FTSE Eurotop 300
 ® 
stock index.The NYMEX Division heating oil futures contract, the world’s first successful energyfutures contact, was introduced in 1978. The light, sweet crude oil contact, launched in1983, is the most actively traded futures contract based on a physical commodity in theworld. These contracts, and the others that make up the Exchange’s energy complex havebeen adopted as pricing benchmarks in energy markets worldwide.
NYMEX ACCESS
®
The Exchange’s electronic trading system, NYMEX ACCESS
 ® 
, allows trading inenergy futures and options, platinum futures and options, and other metals futures after thetrading floor has closed for the day. The NYMEX ACCESS
 ® 
trading session for light, sweetcrude oil; heating oil; New York Harbor unleaded gasoline; and the metals contracts beginsat 4 P.M. and concludes at 8 A.M. the following morning, Mondays through Thursdays. ASunday evening session commences at 7 P.M. When combined with the daily open outcrysession, NYMEX ACCESS
 ® 
extends the trading day to approximately 22 hours.
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