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Sugar Options for Consumers

'I want protection against prices increasing, but also I'd like to benefit if prices fall.'

 

Your need

You are a consumer (buyer) of sugar and would like to have protection against sugar prices rising but also have the opportunity to benefit if prices fall.

Solution

A sugar option allows you to remain at a floating commodity reference price while being protected should commodity prices rise above the agreed maximum price (call strike price), in return for your paying a premium.

How it works

After credit approval, you enter into a sugar option with the Bank. You will specify the call strike price, the transaction amount and the exercise date/s. The Bank will determine the premium.

Possible outcomes on the expiration date
  • Commodity reference price is higher than the call strike price - the Bank must pay you the difference between the call strike price and the commodity reference price.
  • Commodity reference price is equal to or below the call strike price - you and the Bank will have no further obligations to each other with respect to the sugar option. The result will be that you can buy physical sugar at a price that is equal to or more favourable than the call strike price.

Benefits
  • You receive protection against any rise in the commodity reference price above the agreed call strike price and the potential to benefit if prices fall.
  • Can be customised so you can determine the call strike price, transaction amount and exercise date/s.
  • Are cash settled so no need to physically deliver sugar to the Bank.
  • There are no complex exchange traded brokerage and margin calls.

Points to consider
  • You have to pay a premium to the Bank as an up-front payment.
  • You are not covered for the basis risk, which is the risk arising from entering into a hedge transaction that is not identical with the risk being covered.
  • The sugar option may expire worthless resulting in the premium being an additional cost to you.



     Like to know more?

  • You'll find more detailed examples, including pricing on our secure commodities website. Register Here
  • Email us to schedule a contact time to discuss your commodity requirements.
  • Call us on 1800 633 957 from 8am to 5pm (Sydney time) Monday to Friday.

Important information about advice
As this advice has been prepared without considering your objectives, financial situation or needs, you should, before acting on the advice, consider its appropriateness to your circumstances. View our Financial Services Guide (PDF 59kb).

View the Product Disclosure Statement (PDS) for Agricultural Options (PDF 141kb) issued by the Commonwealth Bank of Australia, and consider it before making any decision about the product.
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