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Derivatives

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  • February 8, 2022
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Degree Day Collar

A weather derivative combination that is mainly used in fuel cost risk management to limit fuel cost exposure to a preset range depending on the severity of weather. This collar strategy involves the selling of a degree day call on a high strike and the purchase of a degree day put on a lower strike, creating whereby a maximum bound (cap) and minimum bound (floor), or a range, in which degree days fluctuate without extremely impacting operations.


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