CALENDAR SPREAD
Calendar, or time, spreads describe the price differential, or spread, that may arise between differently dated futures contracts.

CALLABLE SWAP
A swap in which the fixed-rate payer has the right to terminate the swap after a certain time if rates fall. Often done in conjunction with callable debt issues, where an issuer is more concerned with the cost of debt than the maturity. In some definitions of a callable swap, the fixed-rate receiver has the right to terminate the swap. Also known as a cancellable swap.

CALL OPTION
An option which gives the buyer (holder) the right, but not the obligation, to buy a futures contract (go long in a futures position) or physical commodity for a specified price within a specified period of time in exchange for a one-time premium payment. It obligates the seller (writer) of the option to sell the underlying futures contract (enter into a short futures position) or commodity at the designated price, should the option be exercised at that price.

CALL SPREAD
An options position formed by the purchase of a call option at one level and the sale of a call option at some higher level. The premium received by selling one option reduces the cost of buying the other, but participation is limited if the underlying goes up.  

CALORIFIC VALUE (CV)
A measure of the amount of energy released as heat when a fuel is burned. It may be measured wet (with water vapour) or dry (after the water vapour has been removed). It may also be measured gross or net, where gross includes the heat produced when the water vapour is condensed into a liquid and net does not. Generally CV is measured gross and dry.

CAP
A supply contract between a buyer and seller, whereby the buyer is assured that he or she will not have to pay more than a given maximum price. This type of contract is analogous to a call option.

CAPACITY
Gas -- it is the rated transportation volume of natural gas pipelines, typically expressed in millions of cubic feet per day.

Electricity -- it is the rated load-carrying capability of electrical equipment such as generators or transmission lines, typically expressed in megawatts or megavoltamperes.

CAPACITY BENEFIT MARGIN (CBM)
The amount of transmission transfer capability reserved by load serving entities to ensure access to generation from interconnected systems in order to meet generation reliability requirements. Reservation of CBM by a load serving entity allows that entity to reduce its installed generating capacity below that which may otherwise have been necessary without interconnections to meet its generation reliability requirements.

CAPACITY CHARGE
In gas or electricity markets, a price set based on reserved capacity or measured demand and irrespective of energy delivered. Also known as demand charge.

CAPACITY OPTIONS
The right to access the output of a plant, whose generation is specifically earmarked.

CAPACITY TRADING
Where a gas shipper with spare capacity in a transportation system.

CARRY FORWARD
In Gas, if, in a given contract period (often a year), a buyer has taken over and above the annual contract quantity then, if there is no accumulated make-up-gas, the buyer can carry forward this excess for future use. The buyer may use the carry forward to offset the take-or-pay obligation though there may be a limit to the amount of carry forward allowed in any given contract period.

CARRYING CHARGE
The total cost of storing a physical commodity, including storage, insurance, interest, and opportunity cost.

CASH-AND-CARRY ARBITRAGE
A strategy in which a trader generates a riskless profit by selling a futures contract and buying the underlying to deliver into it. The futures contract must be theoretically expensive relative to the underlying. If the futures are theoretically cheap compared to cash, the trader could sell the underlying and buy the futures – reverse cash-and-carry arbitrage.

CASH MARKET
Spot market.

CHAIN
A forward contract for the delivery of a commodity that has been traded many times by several parties, thereby forming a chain between the final buyer and the initial seller.

CHARTIST
A market participant who uses technical analysis to chart the price patterns of commodities.  The chartist then makes buy and sell decisions based on this analysis. Chartists believe recurring patterns of trading can help them forecast future price movements.

CO-FIRING
Burning natural gas as well as another fuel type (usually coal) in order to decrease the amount of air pollutants and/or use the most competitively priced fuels available.

COGENERATOR
A generating facility that produces electricity and another form of useful thermal energy (such as heat or steam), used for industrial, commercial, heating or cooling purposes.

COLLAR
A supply contract between a buyer and a seller of a commodity, whereby the buyer is assured that he will not have to pay more than some maximum price, and whereby the seller is assured of receiving some minimum price. Frequently, this takes the form of an options collar, involving the simultaneous purchase of an out-of-the-money call and sale of an out-of-the-money put.

COMBINED-CYCLE GAS TURBINE (CCGT)
An energy-efficient gas turbine system where the first turbine generates electricity from the gas produced during fuel combustion. The hot gases pass through a boiler and then into the atmosphere. The steam from the boiler drives the second electricity generating turbine.

COMBINED HEAT AND POWER (CHP)
A power station system that uses both gas and the heat/steam generated to produce electricity. Also known as cogeneration.

COMBUSTION TURBINE
Electric generator that uses a jet engine as the prime mover. Often fueled by natural gas or petroleum products and used as peaking generation.

CO-MINGLED
When a gas or crude oil which is outside contract specifications has been mixed with another gas in order to bring it within the required quality specifications.

COMMISSIONING GAS
Gas produced when a new field starts up, or the gas needed during the start up of a power station. In both cases the amount and timing of the requirements are not exact.

COMMODITY SWAP
Commodity swaps enable both producers and consumers to hedge commodity prices. The consumer is usually a fixed payer and the producer a floating payer: if the floating-rate price of the commodity is higher than the fixed price, the difference is paid by the floating payer, and vice versa. Usually only the payment streams, not the principal, are exchanged, although physical delivery is becoming increasingly common.

COMMON CARRIAGE
Where a pipeline owner is obliged to transport gas in its pipeline in an nondiscriminating way.

COMPOUND OPTION
An option that allows its holder to purchase or sell another option for a fixed price.

COMPRESSOR STATION
Gas loses pressure as it travels over long distances. A compressor station, usually a gas turbine engine, is an installation which recompresses the gas to the required pressure.

CONTANGO
Term used to describe an energy market in which the anticipated value of the spot price in the future is higher than the current spot price. When a market is in contango, market participants expect the spot price to go up. The reverse situation is described as backwardation.

CONTINGENCY ORDER
An order which becomes effective only upon the fulfilment of some predefined condition.

CONTINGENT CLAIM
The technical term for a derivative instrument in theoretical models.

CONTINGENT PREMIUM OPTION
An option for which the purchaser pays no premium unless the option is exercised. As a rule of thumb, the premium eventually paid is equal to the premium payable on a normal option, divided by the option delta. Hence the price increases dramatically for out-of-the-money options.

CONTINGENT SWAP
A swap that is only activated when rates reach a certain level or a specific event occurs.

CONTRACT CUSTOMER
A gas buyer who negotiates terms with the seller, unlike small, domestic users who pay by fixed tariff.

CONTRACT PATH
Electric transmission path for a generation transaction that is specified by contract but that may not take into account loop flows through neighbouring systems.

COORDINATION TRANSACTIONS
Short-term transactions undertaken primarily to maintain the integrity of an electricity system.

CORRELATION
A measure of the degree to which changes in two variables are related. Correlation ranges between plus one (perfect correlation – the same amount of movement in the same direction) and minus one (perfect negative correlation – the same amount of movement in opposite directions). Like volatility, it can be calculated from historical data but such calculations are not necessarily good predictors of future behaviour.
If the correlation between markets is known, an option position in one market can be offset against another with similar direction and volatility. This is advantageous because it can circumvent difficult hedging environments and can lower costs.
Correlation is also important to the pricing of some options, particularly those which offer exposure to more than one market variable. The payout of a spread option or a yield curve option is based on the correlation between two underlyings separated by space, time or asset, while that of a quanto product will depend on the extent of the relationship between movements in the underlying and movements in the exchange rate.

CORRIDOR
The buyer of a corridor purchases a cap with a lower strike while selling a second cap with a higher strike. The premium earned from the sale of the second cap reduces the total cost of the corridor. The buyer is protected from rates rising above the first cap’s strike, but exposed again if they rise past the second cap’s strike. This liability can be limited by selling a knock-out cap, rather than a conventional cap.

COST BASE
The initial capital and running costs of a regulated utility, used by regulators to work out how much the utility should be allowed to charge its customers.

COST OF CARRY
The cost of carry is the difference between the cost of financing an asset and the interest received on that asset. If the financing cost if lower than the interest, the asset is said to have a positive cost of carry; if higher, the cost of carry is negative.

COVERED OPTION
A covered  call option iswhere the writer owns the underlying asset on which the option is written.  A covered call would, likely, only be written if the writer believed volatility to be overpriced in the market; the lower the volatility, the less premium the writer gains in return for giving up their upside in the underlying.

A covered put option is where the writer sells the option while holding cash. This technique is used to increase income by receiving option premium. If the market goes down and the option is exercised, the cash can be used to buy the underlying to cover.

Covered put writing is often used as a way of target buying: if an investor has a target price at which he wants to buy, he can set the strike price of the option at that level and receive option premium to increase the yield of the asset. Investors also sell covered puts if markets have fallen rapidly but seem to have bottomed, because of the high volatility typically received in the option.

CREDIT-LINKED NOTE
A credit-linked note (also known as a credit default note) is created by the securitisation of a credit default swap.

CREDIT RISK
Credit risk, or default risk, is the risk that that a financial loss will be incurred if a counterparty to a (derivatives) transaction does not fulfil its financial obligations in a timely manner. It is therefore a function of: the value of the position exposed to default (the credit or credit risk exposure); the proportion of this value that would be recovered in the event of a default and the probability of default. Credit risk is also used loosely to mean the probability of default, regardless of the value that stands to be lost.

CREDIT VALUE-AT-RISK
The credit value-at-risk (CVAR) of a portfolio is the worst loss expected to be suffered due to counterparty default over a given period of time with a given probability. The time period is known as the holding period and the probability is known as the confidence interval. Credit value-at-risk is not an estimate of the worst possible loss, but the largest likely loss.

CROSS-SUBSIDISATION
Where certain customers or customer groups are subsidised by one party or group that is required to pay a disproportionate share of the service costs.

CUBIC FOOT
One of the standards used to measure a volume of gas.

CYLINDER
A cylinder, also known as a range forward or risk reversal, is the simultaneous purchase of an out-of-the-money put option and sale of an out-of-the-money call option at different strike prices. The purchaser can hedge its downside at reduced cost, since the purchase of the put is partly financed by the sale of the call, but at the cost of relinquishing any upside beyond the higher strike.