| American option |
An option that may be exercised on any day ahead of expiry.
These trade on the futures exchanges. |
options |
| Arbitrage |
The simultaneous purchase and sale of an instrument in two
separate markets, when the price is out of line. |
futures/options/ swaps |
| Asian option |
An option that is exercised against an average over a period. |
options |
| At the money option (ATM) |
An option with an exercise price at the current market level
of the underlying. |
options |
| Basis |
The gap between the active futures price and the implied forward
price of the underlying commodity. |
futures |
| Basis swap |
Basis swaps are used to hedge exposure to basis risks, such
as locational risk or time exposure risk. For example, a natural gas basis
swap could be used to hedge a locational price risk: the seller receives
from the buyer a Nymex settlement value (usually the average of the last
three days closing prices) plus a negotiated fixed basis, and pays the buyer
the published index value of gas sold at a specified location (Source: Risk
Publications) |
swaps |
| Black-Scholes
|
Options pricing theory derived by Fisher Black and Myron Scholes,
based on the theory that price volatility is random around a given trend. |
options |
| Call |
The right, but not the obligation, to buy something, for instance,
a future. |
options |
| Combination hedging |
A risk management strategy that uses a combination of hedges
using different derivative instruments (Source: Risk Publications) |
futures/options/swaps |
| Contracts for difference |
This term is used as an alternative to the term swap. The
term is often applied to hedging instruments used in the UK electricity
market, and in the Brent 'CFD' market. (Source: Risk Publications) |
swaps |
| Covered option |
An option written against an underlying position |
options |
| Curve-lock swap |
Swap which "locks" the counterparty into an existing
price relationship in the forward curve, with the aim of benefiting from
any shifts in the forward curve e.g. between backwardation and contango
(Source: Risk Publications) |
swaps |
| Delta |
The rate of change of the value of an option with respect
to changes in the price of the underlying commodity |
options |
| Diff swaps |
Contract to exchange the difference between 1) the differential
between the price of two products (fixed), and 2) the actual differential
over time (floating) (Source: Risk Publications) |
swaps |
| Double-up swap |
This instrument grants the swap provider an option to double
the swap volume before the pricing period starts; granting this option,
swap users can achieve a swap price which is better than the actual market
price. The mechanism by which this is achieved involves consumers 0,vho
are buying fixed) selling a put swaption, or producers (who are selling
fixed) selling a call swaption; in either case, the premium earned from
the sale is used to subsidize the swap price. (Source: Risk Publications) |
swaps |
| European option |
Option that can only be exercised on the date of expiry. These
typically trade in the OTC markets. For metals, expiry is the third to last
day of the month since settlement. In crude oil, options expire OTC six
days prior to the 25th of the month or three days before the underlying
future expires. |
options |
| Exchange-traded |
Futures or options that are traded on an exchange such as
NYMEX or IPE, with standard contracts and rules. |
futures/options |
| Exercise |
The conversion of the option into the underlying commodity |
options |
| Extendable swap |
The extendable swap is constructed on the same principle as
the double-up swap , except that instead of doubling the swap, the provider
has the right to extend the swap, at the end of the agreed period, for a
further predetermined period (Source: Risk Publications) |
swaps |
| Futures |
A forward contract that trades on an organized
exchange allowing traders to take position in the market at a future date |
futures |
| Gamma |
The rate of change in delta per unit change in the underlying
instrument. |
options |
| Historic volatility |
The change in the absolute value of a commodity or instrument
over a certain period, expressed as a percentage of the LOWEST price recorded
in that period. |
futures/options/swaps |
| Implied volatility |
The volatility implied by a certain option price. |
options |
| In the money option (ITM) |
An option with an exercise price higher than the current value
of the underlying commodity. |
options |
| Index swap |
Iin the natural gas market in North America, index swaps are
often used to hedge against location price risk (a form of basis risk).
The seller receives a fixed, or otherwise determined, price and pays the
buyer the published index value for natural gas from a specified location
(Source: Risk Publications) |
swaps |
| Inter-month spread |
Simultaneous purchase and sale of a future in two separate
trading periods |
futures/options/swaps |
| Long position |
A trader buys something, in the hope that its value will go
up |
futures/options/swaps |
| Long-liquidation |
Selling of a long position |
futures/options/swaps |
| Margin swap |
Refining margin swaps (Source: Risk Publications) |
swaps |
| Margins |
A deposit paid on a futures transaction. Initial margin is
paid, followed by top-ups as the position develops. Margins are paid to
the exchange. |
futures |
| Naked option |
A short option position in which the writer does not have
the underlying commodity |
options |
| Off-market swap |
In this type of swap, a premium is built into the swap price
to fund the purchase of options or to allow for the restructuring of a hedge
portfolio. Off-market swaps are generally used to restructure or cancel
old swap/hedge deals: essentially, they simulate a refinancing pack-age
(Source: Risk Publications) |
swaps |
| Options |
A system of trading under which the writer of the option gives
someone the right but not the obligation to buy or sell an underlying commodity,
for instance, a futures contract. Options can be over-the-counter or exchange-traded.
Because the writer of the option faces more risk than the buyer, he charges
a premium for his services. |
options |
| Out of the money option (OTM) |
An option with an exercise prices lower than the current market
level of the underlying instrument. Such an option has no intrinsic value,
but has got time value, as price changes in the underlying might bring it
back into the money. |
options |
| Over the counter (OTC) |
Bilateral markets in which contracts for futures, options
and swaps are written on a tailor-made basis. |
futures/options/swaps |
| Participation swap |
Similar to a regular swap in that the fixed price payer is
fully protected when prices rise above the agreed (fixed) price, with the
difference that the client -participates" in any price decrease. For
example, a participation swap agreed at a level of $80/mt for high sulfur
fuel oil, with a 50% participation, would offer full protection against
prices above $80/mt. But tile buyer would retain 50% of the savings generated
when prices fell below $80/mt. (Source: Risk Publications) |
swaps |
| Premium |
The price of an option, as determined by an options pricing
model. |
options |
| Pre-paid swap |
By means of a pre-paid swap, the fixed payments that form
one side of the cash-flows generated by a standard swap, and which are normally
paid over the life of the swap, arc discounted hack to their net pre-sent
value and paid as an immediate cash sum to one of the swap counterparties.
That counterparty will then make floating price pay-merits over the life
of the swap, just as in a standard swap. Pre-paid swaps are often used as
a source of project finance or pre-export financing. (Source: Risk Publications) |
swaps |
| Profit-taking |
Long liquidation or short-covering set off by the desire to
realize the profits in a position. |
futures/options/swaps |
| Put |
The right, but no the obligation, to sell something, for instance,
a future. |
options |
| Refining margin swaps |
Swaps that simultaneously hedge the price of the products
(or output) of a refinery, and the price of the crude oil feedstock (or
input). That is, the products are sold, and the crude is bought, for equivalent
for-ward periods. Refinery margin swaps effectively "lock-in"
the profitability of a refinery. (Source: Risk Publications) |
swaps |
| Rho |
The rate of change of the value of an option with respect
to the risk-free rate of interest. |
options |
| Short position |
A trader sells something he doesn't have, with a view to buying
it cheaper at a later date. |
futures/options/swaps |
| Short-covering |
Buying back of short sell positions. |
futures/options/swaps |
| Spread |
The difference between two futures contract months (or contracts
for different commodities). |
|
| Stop-loss orders |
Buy or sell orders put in through a broker, which are automatically
triggered if the price moves above or below a certain level. |
futures |
| Straddle (long) |
Simultaneous purchase of a put and a call option with different
maturities. This is a bet that volatility will increase; the rise in the
value of one option will offset the non-productive premium paid by the other
option. |
options |
| Straddle (short) |
Simultaneous sale of a put and a call with different maturities,
with a view that volatility will go down. |
options |
| Strangle |
Buying call and buying put with the same maturity. |
|
| Strike price |
The price which the buyer of an option decides to lock in.
For instance, at $13.00 spot, WTI puts and calls can be written at strike
prices at ...$14.00, $13.50, $13.00, $12.50, 12.00... |
options |
| Swaption |
Option to purchase (call swaption) or sell (put swaption)
a swap at some future date. (Source: Risk Publications) |
swaps/options |
| Theta |
The rate of change of the value of an option with respect
to time. |
options |
| Vega |
The rate of change of the value of an option with respect
to the volatility of the underlying instrument (also sometimes called kappa). |
options |
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