Surcharge Hedging

[marGinTale]

Hello,



Any deja vues, before I reinvent the wheel:



Take following surcharge problem:



A price for a physical good or service is subject to a surcharge program depending on the behavior of the average of an index (e.g. daily diesel prices).

- Start off at some point in time with the Index value x0

- average the Index over time length dt

- if the average of the index is more than 10% over the start off value a surcharge is levied (symmetrically to the downside)

- reset the value of the index to 1.1 * x0



How would one hedge the surcharge?

As a portfolio of Asian compound options?

Do a MC?



Many thanks for ideas or directional pointers

[FDAXHunter]

(Sorry, I can't help you but that is one great username!)

[HeatOilTrader]

I can't help you for another reason but these folks were willing to show me how they structure it...