"A derivative is a trading instrument, the value of which is determined from the value or values of one or more physical

commodities and/or financial securities underlying the derivative." -p31 underlying commodity or security-"The physical commodity and/or financial security from which a derivative obtains its value is called the underlying commodity or security." (p31) hedging- is used ".. when describing the purpose of entering a transaction with the intent of offsetting risk from another related transaction." (p32) bid/offer spread or market-Difference between "the highest price at which buyers are currently willing to pay (the bid) and the lowest price at which sellers are currently willing to sell (the offer)." (p33) handle-The price quoted by futures brokers and the style in which it is quoted usually a shorthand version, leaving it up to the trader to know the full handle which is in other words means the root price. (Sturm, p.33). bid-The highest price which buyers are currently willing to pay. The "buy price." (p33)

lifted the offer-"If, after obtaining the current market for a given commodity or security, a trader pays the offer price, the trader has lifted the offer in the market." Lifted the offer means after obtaining the current market for a given commodity or security, a trader pays the offer price. A trader must sometimes lift the offer from its resting place to buy from a seller(Sturm, p. 34).

Hit the bid- if the trader sells at the bid price , the trader is said to hit the bid in the market. A trader must sometimes come down and hit the bid to give it to the buyer (Sturm, p. 34) Hit the bid-"If the trader sells at the bid price, the trader is said to have hit the bid in the market."

taking delivery-"Anyone who has bought futures contracts and does not sell them before their expiration date must take delivery of the actual physical supply they have contracted to buy." (p37)

making delivery-"Anyone who has sold futures contracts short and does not buy them back before expiration will be required to supply that quantity of physical product for a buyer to receive." (p37) margining-Margining means is in the futures market, the initial down payment. (Sturm, p. 37).

margining -"...leveraging is the effect of magnifying the outcome of an investment through the use of borrowed funds, or a small down payment. This initial down payment is called the margin." (p37) Initial margin is the amount of money a trader must have on deposit with the exchange in order to buy or sell futures contracts (Sturm, p.37). margin maintenance call- "A trader will receive notice of a margin call if the value of its position has deteriorated beyond the amount of the initial margin requirement. That is, the futures exchange will require the trader to deposit additional funds into the account to cover this potential loss if it is realized." (p38) Index- "A price which represents the most commonly traded fixed price at a major trading point during bid week." (p39) Inside FERC Gas Market Report- Industry newsletter most commonly referenced for index pricing, etc. (p39-40). The Inside FERC Gas Market point is the industry newsletter. It publishes indexes for major trading points during the first days of each month. (Sturm, p.39-40)

floating average -Fluctuating average of index prices during bid week.

(p40)

43 fixed-for-floating -When a trading company is buying gas at a fixed price and selling it at a floating price. 43 future swap"This type of swap performs almost the same function as a futures contract with the exception that, after expiration of the futures contract, there is a financial settlement for futures swaps (exchange of payments), as opposed to a physical settlement (making or taking delivery if an open position is held through expiration) in the case of actual futures contracts." 43 or 55 basis swaps "Basis, in the natural gas market, is the difference in value between gas at one delivery point and gas at another."

44 L3D price "simple average of the last three trading day's futures settlement prices" 44 settlement price "The settlement price for any given trading day, is calculated by the futures exchange as the true weighted-average price of every trade done in the final two minutes of trading for that day.

47 unwinding "Unwinding is the term used in the swap market for the process whereby a position or positions, created from a previous swap trade or series of swap trades, is eliminated by entering trades in the equal and opposite direction of the previous trade." 47 liquidating "... the process whereby a futures position created from a previous trade or series of trades is eliminated by buying or selling the futures contracts in the equal and opposite direction of the position." 49 liquidation risk "Liquidation risk is the risk that a trader cannot successfully eliminate his or her open futures position at a price exactly equal to L3D." 55 scalp "...buying futures swaps at a discount to futures and selling them at a premium..."

Answer 55 basis swap "Basis, in the natural gas market, is the difference in value between gas at one delivery point and gas at another." Swing- "In the physical market, a swing transaction is a purchase or sale under an interruptible contract which is renegotiated (in terms of price and volume) day-by-day. These types of transactions are extremely popular and make up the bulk of the trading activity in the day-to-day natural gas market." (p. 82) "A swing swap is a fixed-float index swap that references the average of daily indexes published by Gas Daily as a floating price instead of the commonly referenced monthly indexes published by Inside FERC." (p. 83) Spread trading is the practice of taking a position in one month and off-setting it with an equal but opposite position in the previous or following month. The expectation is that the two prices will converge or diverge. (p. 88)

"An exchange of futures for physical (EFP) is a contractual arrangement between two parties, under which one party will give futures contracts to the other and receive physical gas from that party in return. Both parties agree on the following specifics: 1. posted price The price at which the futures contracts are transferred from one account to the other. 2. differential - The difference in value, if any, between the futures contracts and the physical gas. 3. delivery point - The location where one party will deliver and the other will receive the physical gas. 4. size - The daily volume of product bought/sol and, equivalently the total number of futures contracts to be exchanged. 5. invoice price - The price paid by the buyer to the seller for the physical gas, calculated as the posted price plus the differential." (p.90)

"exchange of futures for physical" refers to a "contractual agreement between two parties, under which one party will give futures contracts to the other and receive physical gas from that party in return"(Sturm, p.90). Month spreads-"The differences between prices of two months are called month spreads." (p. 88) A call option grants the buyer of the option the right, but not the obligation, to buy the underlying commodity or security from the seller of the call option at a specified price (strike price) at any time up to and including the expiration of the option. (Sturm, p. 128) strike price- The price set to activate an option. (Sturm, p. 128) option premium-the price the buyer has paid for the option. (Sturm, p. 128) Exercising an option is the process whereby the buyer of an option (either a put or a call) elects to execute its given right to either buy (call) or sell (put) the underlying commodity or security from or to the option seller at the strike price. (Sturm, p. 129) intrinsic value is the positive difference, if any, between the strike price of the option, and the price of the underlying commodity or security for which that option is based on. (Sturm, p. 130)