An option that gives the holder the right to exchange a base asset (a crude commodity) for one or two other assets (processed commodities) at a preset strike price (s). Crack options are mainly used by companies which are exposed to the so-called crash-spread risk. This risk results from the difference spread between the prices of an input commodity and a related output product. For example, an oil refiner may be exposed to the adverse movements in the prices of crude oil relative to that of refined products. The crack spread risk arises from the difference between the price of the input commodity and that of the output product. The prices of underlying assets can either be their respective future prices (for an exchange-traded crack option) or their respective swap rates (for an OTC crack option).
Derivatives
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