BACK MONTH
Back month contracts are any exchange-traded derivatives contracts apart from the nearest, or front, contract month.

BACKWARDATION
When the price of the nearer term, typically prompt, or another underlying commodity or instrument trades at a premium to the same commodity or instrument traded further forward. Also known as an inverse.

BANKING
Where excess gas is lent from one shipper to another shipper to be returned at a later date.

BARRIER OPTION
Barrier options are exotic options which either come to life or are extinguished under conditions stipulated in the option contract. The conditions are usually defined in terms of a price level that may be reached at any time during the life of the option.

BASELOAD
The minimum amount of electric power delivered or required over a given period of time at a steady rate.

BASELOAD GENERATION
Electric generating equipment normally operated to serve loads on an around-the-clock basis.

BASIS
The differential that exists at any time between the spot price (or cash price) of a given commodity and the price of the nearest futures contract for the same (or related) commodity. The basis may reflect different time periods, product forms, qualities or locations. The cash price minus the futures price equals the basis.

BASIS RISK
Basis risk is the risk that the value of a futures contract (or an OTC contract) that does not move in line with that of the underlying exposure. Alternatively, it is the risk that the cash-futures spread will widen or narrow between the times at which a hedge position is implemented or liquidated.

BASIS SWAP
Basis swaps are used to hedge exposure to basis risk, such as location risk or time exposure risk.

BASIS TRADING
To basis trade is to deal simultaneously in a derivative contract, normally a futures contract, and the underlying commodity. The purpose is either to cover derivatives sold, or to attempt an arbitrage strategy. This arbitrage can either take advantage of an existing mis-pricing or be based on speculation that the basis risk will change.

BASKET SWAP
A swap in which the floating leg is based on the returns on a basket of underlying commodities.

BCF
Billion cubic feet of gas.

BEAR SPREAD
An option spread trade that reflects a bearish view on the market, usually the purchase of a put spread.

BETA
The beta of a rate or price is the extent to which that rate or price follows movements in the overall market. If the beta is greater than one, it is more volatile than the market; if the beta is less than one, it is less volatile.

BILATERAL NETTING
An agreement between two counterparties to offset the value of all contracts,  in-the-money and out-of-the-money, resulting in a single net exposure amount owed by one counterparty to the other.

BID/ASK
A measure of market liquidity, also known as bid/offer. The bid is the price level at which buyers are willing to buy and the ask is the price level at which sellers are willing to sell. The thinner the spread the higher the liquidity.

BINOMIAL MODEL
Any model that incorporates a binomial tree, also called a binomial lattice. A binomial model describes the evolution of a random variable over a series of time steps, assigning given probabilities to a rise or fall in the variable. After the initial rise or fall, the next two branches will each have two possible outcomes and so the process will continue, building a ‘tree’ over time. The process is usually specified such that an upward movement followed by a downward movement results in the same price, so that the branches recombine. Binomial trees are of interest because they can be used to deal with American-style features; the early exercise condition can be tested at each point in the tree.

BLACK-SCHOLES MODEL
An option-pricing model initially derived by Fischer Black and Myron Scholes in 1973 for securities options and later refined by Black in 1976 for options on futures.

BLENDING
Mixing gas of different specifications to produce one within the required gas specification.

BOOK
The total of all forward positions held by a trader or company.

BOOK TRANSFER or BOOKING OUT
The transfer of title of a cash commodity to the buyer without a corresponding physical movement.

BRITISH THERMAL UNIT (BTU)
The amount of heat required to raise the temperature of 1lb of water by 1 degree Fahrenheit (technically from 60°F to 61°F). It is used to compare the heat producing value of different fuels.

BROKER
An intermediary between traders for physical, futures and over-the-counter deals. Brokers receive a fixed commission predetermined between the broker and his/her client.

BTU
British Thermal Unit.

BULL SPREAD
An option spread trade that reflects a bullish view on the market, usually the purchase of a call spread.

BUNDLED RATE
A combined charge for the provision of two or more services – eg, gas transportation and storage, or electricity generation and transmission.

BUNDLED SERVICES
Two or more electric or gas services provided at a combined charge – eg, gas transportation and storage; electric generation and transmission.

BUTTERFLY SPREAD
The simultaneous purchase of an out-of-the-money strangle and sale of an at-the-money straddle. The buyer profits if the underlying remains stable, and has limited risk in the event of a large move in either direction.

BUYER’S NOMINATION CONTRACT
A gas contract where the buyer has the option to nominate the delivery requirements up to the predefined delivery capacity. The seller is obliged, under this type of contract, to deliver as requested, although limits are often built into the contract.