Detailed Glossary

A Detailed Glossary of Energy Trading terms for registered users

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Nick Henfrey

P&L atttribution

Let's say we added up the P&L of all our trades today, and then did the same tomorrow - the two values would probably be different - but why?

Some reasons:

• We booked some new trades
• The forward curve price changed
• The FX rate we use to give reporting currency P&L changed
• The discounting factor changed
• Some trades were amended

P&L attribution calculates the change in P&L for each of the above individually - and any other factors - so that the effect of each cause may be understood

Detail

The exact calculation is rather complex, for example if we want to know the effect of new trades, do we value them against yesterday's curve price or today's? If we use today's then in effect we have partially attributed some P&L change to the new curve price

In general the P&L of each trade, or a netted exposure across a portfolio is is recalculated individually for each change that might affect the p&l (forward curve, fx rates etc), keeping each other effect constant

Because each change is taken in isolation the the sum of all P&L attribution detail does not add up to the overall change in P&L...

P&L attribution is often called P&L explained or P&L explainer

 Keyword(s): P&L explainedP&L explainer

Party

A party is an organization, or part of an organization, which is legally involved in a trade

Detail

Every trade has at least two parties: a buyer and a seller

Our organization, or part of organization, is referred to as the first party, the other organization, or part of an organization is the counterparty

There may be a broker who introduces the buyer and seller - the buyer and seller are not known to each other until the trade is executed

If our organization executes a trade on an Exchange then the Exchange is the counterparty

 Keyword(s): counterpartypartiescounterparties

Physical

The attribute, or adjective, physical usually refers to trades and business process that results or involves in the physical delivery of energy or a commodity

Detail

A trade is physically settled when it will result in the delivery of an energy or commodity. This is in contrast to a trade that is financially or cash settled

Physical business process involves the activities around

Scheduling delivery of electricity and gas (Operations)

Logistics of moving and delivering other commodities by ship, barge, train, plane, truck etc. including loading and unloading and inspections

 Keyword(s): physicalityphysically

Portfolio

A group of trades

Detail

Trading organizations group trades in order to simplify position management, risk reporting and settlement.

By grouping trades that have a common or complementary purpose, traders can focus on the performance of the portfolio as a whole, rather than the individual trades that make it up

Note the similarity to a trading book

 Keyword(s): portfolios

Position

All physically settled derivatives imply either an obligation to deliver, or take delivery of, a commodity at a location at some time in the future

The obligation to deliver a commodity is called a short position of that commodity at that location and time in the future

The obligation to take delivery of a commodity is called a long position of that commodity at that location and time in the future

Detail

Traders sum the position of a set of trades to know their net position across that group of trades - usually called a portfolio, a book or a strategy. This is known as the traded, or trader, position

Traders take a long position if they believe the value of the commodity at the time of delivery will be greater than the contract, or strike, price

Traders take a short position if they believe the value of the commodity at the time of delivery will be less than the contract, or strike, price. Taking a short position is sometimes known as shorting

Each time a trade is executed the trader's net position changes. Most traders update their net position as each trade is executed

 Keyword(s): Positions

Position Reporting

Traders make, and lose, money by taking positions, either short or long at various points in the future

Open positions in the future imply a risk that needs to be managed very carefully as changes in the forward curves affect the value of the net open position

It is therefore critical that traders know their up to date position at all times

This is the purpose of Position Reporting by means of Position Reports

Detail

 Keyword(s): Position Report

Power

In Energy Trading terms Power is almost always synonymous with Electricity

In physics terms power is a measure of the rate of energy conversion per unit time

Detail

In SI terms energy is measured in Joules

One watt = one Joule per second

1 kilowatt (kW) = 1,000 joules per second

1 megawatt (MW) = 1,000 kW

1 gigawatt (GW) = 1,000 MW

1 terawatt (TW) = 1,000 TW

Since power is energy per unit time (energy divided by time) it follows that energy is power multiplied by time

Frequently energy is measured in these terms:

1 kWh = 1 kilowatt for an hour = 3,600 * 1,000 joules = 3,600,000 joules

Product

In Energy trading a Product is a standardized type of trade which may be offered by an Exchange, quoted by a Broker, or be the subject of a published Index

Detail

Note the similarity to an Instrument

A typical product has dimensional attributes of:

 Keyword(s): products

Prompt

A term generally used in gas and power trading for trades that deliver in the near future

Detail

The exact definition is not fixed

Some trading platforms define prompt as completing delivery within a week of the trade date, others within the same month as the trade date

Quark spread

Spread between the price of nuclear fuel and power

Detail

It's fashionable to find a word ending 'ark for fuel to power spreads...

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