Introduction

The risk of natural gas underdelivery constitutes a serious threat to energy market participants. It simultaneously generates volumetric losses and price uncertainty, since a supply deficit is inevitably accompanied by a sharp rise in spot prices. In the context of the volatile European market, where price fluctuations reached exceptional amplitude following 2021–2022, managing such risk has gone beyond the scope of operational planning and become an independent financial task. As Crouhy, Galai, Minasyan, and Mark note, effective risk management presupposes not the elimination of risk, but its transformation into an acceptable form through financial market instruments [2]. It is precisely derivatives that form the core of the modern toolkit for hedging gas underdelivery risk.

Research Objective

The aim of the study is to conduct a comparative analysis of the main financial instruments used to hedge natural gas underdelivery risk and to substantiate the rationale for their combined application, taking into account the price, volume, and temporal components of risk.

Materials and Methods

The study is based on an analysis of academic literature on risk management in energy markets, trading data for gas derivatives on the ICE (TTF) and Henry Hub platforms, as well as analytical materials published by ESMA. The methods employed include comparative analysis, classification, and systematisation of financial instruments according to key parameters: degree of standardisation, nature of the obligation, liquidity, counterparty credit risk, flexibility of terms, and cost of entry.

Derivative financial instruments used to hedge natural gas underdelivery risks are conventionally distinguished along two dimensions: by degree of standardisation (exchange-traded vs. over-the-counter) and by the nature of the arising obligation (symmetric vs. asymmetric). Ivanchenko identifies three principal classes of derivatives suitable for energy hedging. Each possessing a specific risk-return profile [1]. In the context of the gas market, this distinction acquires practical significance: exchange-traded instruments (TTF, Henry Hub) provide liquidity and pricing transparency, whereas over-the-counter contracts allow the structuring of individualised volumetric and temporal delivery profiles.

Results and Discussion

Derivative financial instruments used to hedge natural gas underdelivery risks are conventionally distinguished along two dimensions: by degree of standardisation (exchange-traded vs. over-the-counter) and by the nature of the arising obligation (symmetric vs. asymmetric). Ivanchenko identifies three principal classes of derivatives suitable for energy hedging – forwards and futures, options, and swaps – each possessing a specific risk-return profile [1]. In the context of the gas market, this distinction acquires practical significance: exchange-traded instruments (TTF, Henry Hub) provide liquidity and pricing transparency, whereas over-the-counter contracts allow the structuring of individualised volumetric and temporal delivery profiles.

A comparison of instruments across the key parameters relevant to hedging gas underdelivery risk is shown in Table 1.

Table 1 – Comparative Characteristics of Financial Instruments for Hedging Natural Gas Underdelivery Risks

Source: compiled by the authors based on [1; 2; 3; 4; 5]

The data in Table 1 allow several conclusions to be drawn. First, futures and exchange-traded gas options provide the highest liquidity and minimal credit risk owing to central clearing, which is confirmed by the findings of the European gas derivatives market analysis conducted by Bouveret et al.: following 2022, the volume of open interest in gas futures on ICE more than doubled [5]. Second, forwards and swaps, despite their higher counterparty credit risk, are indispensable where a standard exchange-traded contract does not cover a specific volume or delivery point: it is precisely these instruments that allow the conditions of a replacement delivery to be fixed in the event of partial contract failure. Third, options occupy a special position: Rotondi demonstrates that the price of an option on a gas futures contract systematically deviates from the Black–Scholes model due to the specific nature of gas price volatility, which makes the correct calculation of the premium critically important when options are used as insurance against price spikes under underdelivery conditions [4]. Finally, floating-to-fixed swaps are most effective for stabilising cash flows under long-term supply contracts, as they neutralise the price component of risk without affecting the physical delivery balance.

Practice shows that no single instrument alone provides full coverage of underdelivery risk, since this risk is composite in nature: it encompasses a price component (the rising cost of replacement supply), a volumetric component (the need to physically source an alternative volume), and a temporal component (the immediate availability of delivery). Pouliasis et al. argue for the necessity of applying multi-factor derivative pricing models that simultaneously account for price dynamics, basis risk, and liquidity risk specific to gas markets [3]. This means that, in practice, underdelivery hedging is structured as a combination of instruments: baseline price risk coverage through futures or swaps is supplemented by option-based protection against extreme price events, while forwards are employed to address specific volumetric and geographical gaps. It may therefore be concluded that the choice of an optimal hedging strategy is determined not by the abstract properties of individual instruments, but by the specific risk structure of the market participant – encompassing the delivery horizon, acceptable counterparty credit risk, the budget allocated to premium payments, and liquidity requirements. The comparative analysis presented herein provides a methodological foundation for such a choice and confirms that gas market derivatives constitute a sufficiently comprehensive toolkit for underdelivery risk management, provided they are employed in a well-considered combination.

Conclusion

The choice of an optimal hedging strategy is determined not by the abstract properties of individual instruments, but by the specific risk structure of the market participant. The comparative analysis presented herein provides a methodological foundation for such a choice and confirms that gas market derivatives constitute a sufficiently comprehensive toolkit for underdelivery risk management, provided they are employed in a well-considered combination.