Dark Energy Consulting
Current course
Participants
General
Detailed Glossary
Detailed Glossary
A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z | ALL
Currently sorted Surname ascending Sort by: Surname | First name
ETRM | ||
---|---|---|
Exchange | ||
---|---|---|
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 Detail An Exchange offers standardized contracts, normally
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 | ||
---|---|---|
Convert an Exchange Futures position to a physical position either with an OTC counterparty, or with the Exchange itself Detail 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
| ||
Execution | ||
---|---|---|
Exposure | ||
---|---|---|
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 Detail 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:
Exposures are additive - they can be summed across a set of trades or portfolios Deltas are not additive - because they are dimensionless ratios | ||
Fee | ||
---|---|---|
A fee is a cash payment which may be associated with:
Detail Fees are usually cash payments that are not directly related to delivery of a commodity There are four general categories of fees:
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 | ||
Floating | ||
---|---|---|
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 Detail 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 | ||
---|---|---|
The earliest tradable month of a particular contract - normally a Futures contract Detail 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 | ||
---|---|---|
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 Detail 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 | ||
Gamma | ||
---|---|---|
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 Detail 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/€ | ||