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Price Floor
A price floor is the minimum allowable price under a contract, preventing sales below a set threshold.
In oil markets, price floors protect producers from excessively low market prices, stabilizing revenue and enabling long-term planning. Floors are often embedded in swaps or forward agreements.
Traders use price floors in hedging to mitigate downside risk, while speculators consider them when assessing arbitrage opportunities.
Understanding contract floors is crucial for pricing strategies and risk management.