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Commodity basket options - Understanding commodity correlations

Commodity solutions are often structured using correlation-dependent options. Let's say a car producer wishes to hedge their copper and aluminium costs using a single option.

They enter into a 3-month equally weighted basket option. With the 3 month prices of CU and AL being $9,000 and $2,500 respectively, the strike price of an ATM basket call option would be $5,750 (($9,000 + $2,500) / 2).

What would be Read More

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