Crack Spread

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DEFINITION of 'Crack Spread'

The spread created in commodity markets by purchasing oil futures and offsetting the position by selling gasoline and heating oil futures. This investment alignment allows the investor to hedge against risk due to the offsetting nature of the securities.

BREAKING DOWN 'Crack Spread'

The name of this strategy is derived from the fact that "cracking" oil produces gasoline and heating oil. Therefore, oil refiners are able to generate residual income by entering into these transactions. During the summer of 2005, the effects of hurricanes in the Southeastern United States created large volatility in the crack spread.

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RELATED FAQS
  1. How can I hedge against rising diesel prices?

    In early 2007, the New York Mercantile Exchange announced that traders would be able to buy or sell futures contracts on ... Read Full Answer >>
  2. What is the relationship between oil prices and inflation?

    The price of oil and inflation are often seen as being connected in a cause and effect relationship. As oil prices move up ... Read Full Answer >>
  3. How do futures contracts roll over?

    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>
  4. Why do companies enter into futures contracts?

    Different types of companies may enter into futures contracts for different purposes. The most common reason is to hedge ... Read Full Answer >>
  5. What does a futures contract cost?

    The value of a futures contract is derived from the cash value of the underlying asset. While a futures contract may have ... Read Full Answer >>
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    The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks. Derivatives ... Read Full Answer >>

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