Detailed Glossary

A Detailed Glossary of Energy Trading terms for registered users

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Nick Henfrey



by Nick Henfrey - Tuesday, 21 October 2014, 12:59 PM

Energy Trading and Risk Management - usually referring to a computer system that allows trades to be electronically recorded, and risk measures to be calculated



by Nick Henfrey - Thursday, 19 March 2015, 6:16 PM

An Exchange is a trading organization which matches bids and offers on standardized contracts to form trades. Unlike a Broker the Exchange acts as the counterparty for the trades, and trading is anonymous


An Exchange offers standardized contracts, normally

  • Spots - Forward trades for Prompt delivery (today, tomorrow - day ahead, and sometimes for the forthcoming weekend
  • Futures - Contracts for future delivery, usually weeks, months, quarters, seasons and years, in standardized volumes or rates (e.g. therms per day, Megawatts, Tonnes)
  • Swaps - Financially settled Contracts in the future, usually between a fixed price and an index, or between two indexes
  • Options - Options on standardized contracts for future delivery, offered at a trade price or premium, with a range of strike prices, puts and calls, expiry dates and delivery dates

Spots are delivered and settled in a matter of days - settlement occurring through movement of funds held in a cash account

Futures may be physically or financially settled - credit risk is reduced through daily margining. Physically settled Futures are either converted to equivalent Spots at expiry, or alternative physical delivery is agreed between partners

Swaps are always financially settled through margining

Options, like OTC options, have a defined expiry date, at which time they or may not be exercised, usually into the corresponding exchange traded Futures


Exchange for Physical

by Nick Henfrey - Monday, 8 June 2015, 5:25 PM

Convert an Exchange Futures position to a physical position either with an OTC counterparty, or with the Exchange itself


Classic Futures contracts are settled physically: if you are long 2,000 pork bellies for delivery in May 2018 then, when the contract expires, the Exchange will arrange for one or more parties that are short those pork bellies to make delivery to you at the location, time and price specified in the Futures contract

we don't usually call this Exchange for Physical, since it is the contracted outcome of the Futures contract. The Exchange usually just calls this "Delivery", it is is also known as "Take to Physical" or "Cascade to physical"

Other Futures contracts do not necessarily contractually go physical, or you may want to exchange your regular Futures position for physical before the expiry date, or under different terms

in these cases you may contact the exchange and request an Exchange for Physical - the Exchange will attempt to match you up with another party who wishes to take their opposite position to physical

alternatively you may arrange off the Exchange to Exchange for Physical with another party, and then both contact the Exchange to  notify them

In general, Exchange for Physical is an expensive process, it is usually simpler to close out the Futures position on the Exchange and open an equivalent OTC position on a broker platform




by Nick Henfrey - Wednesday, 29 August 2012, 9:22 AM

In trading terms execution is the act that makes a trade a legally binding contract between the trading parties


A trade may get executed in a number of different ways:



by Nick Henfrey - Monday, 2 June 2014, 6:21 PM

Exposure is the sensitivity of the value of a trade, or a portfolio, to some market variable

A single trade may have Exposure to multiple market variables, and we measure the Exposure to each variable separately. 

In general there is an Exposure to each independent market variable that determines the value of the trade


Consider a simple Physical fixed price Forward delivering in a year's time

There is an Exposure to the commodity underlier, let's say a Coal value

The Exposure is the shift in value of the trade with each unit shift in the price (or value) of the underlier

So a trade to buy 100 tonnes of coal might shift by $1 per tonne, for each shift of $1 per tonne in the price of coal, the 100 tonnes Exposure is 100

100 whats?

Let's look at the units. We want the shift in price = 100 tonnes * $1 per tonne = $100, per unit shift in the price of coal = $100 / $1 / tonne = 100 tonnes 

So the Exposure has units of the underlier!

If you've looked at the definition of Delta you will have seen that Delta is properly the change in value per unit of the trade per change in value per unit of the underlier

So we get the important formula Exposure = Position * Delta

A trade may have multiple deltas and multiple Exposures - our simple Forward deal may not be as simple as we think:

  • There is a Delta and Exposure to the value of coal
  • If we want to know the current value of the trade then there is a Delta and Exposure to the interest rate
  • If we are a European trading organization and we want to know the value of our trade in Euros then there is a Delta and an Exposure to the FX rate between Dollars and Euros - the FX Exposure

Exposures are additive - they can be summed across a set of trades or portfolios

Deltas are not additive - because they are dimensionless ratios



by Nick Henfrey - Wednesday, 25 March 2015, 5:43 PM

A fee is a cash payment which may be associated with:

  • A single trade
  • A group of trades
  • No specific trades


Fees are usually cash payments that are not directly related to delivery of a commodity

There are four general categories of fees:

  • Broker and clearing fees - fees associated with the execution of each trade - these can normally be booked directly against each trade as the ay are incurred
  • Trade services fees - fees generally associated with the delivery of physically shipped commodities like coal and oil - again normally booked against individual trades as they are incurred
  • Non-trade specific fees - cash costs which are incurred as a result of trading - but cannot be allocated to specific trades - for example imbalance costs
  • Non-trade fees - cash costs associated with licences, membership costs etc. 

Fees booked against trades are generally associated with a cash flow type, so that they can be correctly allocated in P&L, invoicing and general ledger accounting



by Nick Henfrey - Wednesday, 25 March 2015, 5:45 PM

A financial side or leg of a trade that is not fixed in advance, but is dependent on the value of some observable (usually an index) at a pre-agreed time related to the delivery date


Most trades involve at least two legs or sides, in a straightforward physical Forward contract one side is the physical delivery of the commodity, the other is the cash payment in settlement of the commodity delivered

In an indexed forward, or floating forward, the cash side is not fixed in advance, but related to an index (usually published daily), and generally fixed in daily or monthly either at the daily price or the average of the daily-published monthly price


Front Month

by Nick Henfrey - Thursday, 26 March 2015, 7:07 AM

The earliest tradable month of a particular contract - normally a Futures contract


It's easiest to give an example:

A March monthly contract may be tradable up to the 25th of February

On 25th February the Front Month would be March

On the 26th February the Front Month would be April 

Contracts beyond the Front Month are sometimes called Back Months


Futures Contract

by Nick Henfrey - Tuesday, 3 June 2014, 7:38 AM

A Futures Contract is an agreement to buy or sell a commodity at a fixed time in the future executed on or with an Exchange


Note the similarity in description to a Forward Contract

We will focus mainly on the differences

Exchanges list standardized products that may be traded. A product describes a standardized commodity, delivery period and delivery location that may be traded

Exchanges list a buy and a sell price for every different product they list. These buy and sell prices are provided by Market Makers

Futures Contracts are always cleared

Futures Contracts may be physically or financially settled

A financially settled futures contract may be taken into the delivery period, and is settled by daily margining at the daily fixed in price

If you're wondering how that is different to an exchange-traded swap - then the difference is a swap is very like a financially settled futures contract, but the swap is generally not daily margined



by Nick Henfrey - Thursday, 26 March 2015, 7:11 AM

Gamma is one of the market risk Greeks 

It measures the sensitivity of the Delta to an underlier or market value

It is of use when the value of the Delta itself varies with the value of the underlier - the Delta being the ratio of the value of the trade or portfolio to the value of an underlier or market value


A Physical Forward has a delta of approximately one with respect to the physical underlier, that is the value of a trade increases by 1% for every 1% increase in the underlier

By contrast an Option may have a delta of anywhere between -1 and +1, and the delta is not constant

At an underlier price of $20/tonne an Option might have a delta of 0.1, but at $40/tonne the delta might be 0.5

Trades with deltas that are constant are called linear (if we were to plot a graph of value against underlier it would be a straight line, the slope is the delta)

Trades with deltas that change with the value of an underlier are called non-linear (if we were to plot a graph of value against underlier it would be not be straight - the gamma is the measure of curvature of the plot at a particular point on the graph)

As an analogy think of delta as speed, it is the ratio of distance to time. Gamma is acceleration, just knowing the speed of an object doesn't tell us whether it is braking hard, accelerating, or at uniform speed - for that we need the acceleration

Because gamma is the change in delta per unit change of price per unit volume of commodity and delta is dimensionless then Gamma has units of 1 / (Price/Volume) = Volume/Price, e.g. Therms/$

Some ETRMs use the term Gamma for the change in Exposure per unit change of price per unit volume of commodity and get Volume / (Price/Volume) = Volume2/Price e.g. MWh2/€

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