Index based pricing allows producers to sell their production at market rates. Sellers who think that the market prices are going to rise should include Index Pricing in their pricing strategy.

Advantage of Index Price:

• Full-market participation
• Producers can take advantage of upward movement in market prices

Risks of Index Price:
The producer will always receive market pricing. Therefore, if prices decrease, producers are at risk to earn less for their production. In order to hedge against unfavorable price movements, a fixed price or costless collar could be used for price risk protection.

Example:
Current prices for natural gas are $3.50. A producer believes natural gas prices will go upward due to cold winter weather and low storage inventory levels. To take advantage of the potential for higher prices, the producer selects an index price from NFM. This way, the producer is able to sell gas for $4.50 in January, when index prices increased.