Detailed Glossary

A Detailed Glossary of Energy Trading terms for registered users

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Nick Henfrey



by Nick Henfrey - Thursday, 19 March 2015, 5:39 PM

A Confirmation is a document describing a trade that has been executed, and is generally sent by the Seller to the Buyer to check the trade details, to be returned by the Buyer confirming that the trade details match the trade as they have recorded it

The Confirmation, or Confirm, process allows both parties to agree the trade details


The Confirmation process, and the form of the Confirmation document are defined in the Master Agreement, usually as an Appendix

The Confirmation match is the final stage of the contract between the two parties, without it the trade is not legally binding, as well as specifying the trade details the Confirmation also specified the Master Agreement under which the trade was executed

Confirmations are not normally produced for Exchange trades

Some parties produce and send Confirmations for both Buy and Sell trades

Confirmations must be signed by an authorized signatory in the Trading Organization

Confirmations are normally produced and signed electronically

Matching Confirms tends to be a manual process - systems of bar coding have been proposed

There are schemes that electronically confirm trades, generically known as ECM (Electronic Confirmation Matching)

These are generally point to point - but there is no reason not to utilize a centralized matching service 



by Nick Henfrey - Tuesday, 4 November 2014, 7:32 AM

Curve is a relatively general term  to describe a set of time series data, for example prices, interest rates, foreign exchange rates (FX), volatilities etc.


In general curve is used as a term to describe time series data that is used to value trades, that is to calculate the unrealized p&l of a trade, or set of trades.

Curve data is usually derived from published data

Curve data is typically published each day - so a curve consists of a set of time series data for each publication date

Publication dates are ususally daily

Point dates may be daily, hourly, monthly, quarter hourly

Because of the separate publication date and point date dimensions there may be a huge amount of data over time for a single curve

A forward curve is usually a set of future price points used to calculate the future value of the physical side of Forwards, Futures, Spreads and Swaps

Curves typically have dimensionality of:






Day Ahead

by Nick Henfrey - Wednesday, 29 October 2014, 7:39 AM

Trading and pricing for delivery the next day


Day Ahead and Within Day trading is responsible for the vast majority of gas and power trades executed

The Day Ahead Market (DAM) is used by

Operations/logistics teams to balance supply to demand

Speculative traders to make money out of the massive liquidity in Day Ahead trading

Day Ahead trading may be executed in the normal ways:

Bilaterally with a counterparty

OTC through a broker platform

In addition there are specialist Spot Exchanges that offer a wide range of within day and day ahead products, traded in two main ways:

Continuous spot trading much like any other OTC or Exchange trading

Day Ahead Auctions - with a fixed close 

At the close of Day Ahead trading many Spot Exchanges publish Day Ahead Settlement prices based on the auctions and/or a particular trading period in the current day, or provide these prices to a third party who publish a Day Ahead settlement price

Day Ahead settlement prices are often used as tradable indexes for indexed or floating forwards. 

These Day Ahead settlement prices are often referred to as Day Ahead indexes



by Nick Henfrey - Monday, 23 March 2015, 7:47 AM

Physically settled trades have a delivery time or period specified in the terms (details) of the trade

Delivery is the physical act of delivery of the traded commodity at the location and time specified in the trade details


The act of physical delivery is made in different ways according to the commodity:


Location is some specified point on the gas pipeline network

Time is usually specified at daily granularity, a trade may cover one or more days, months, quarters or seasons

Power (electricity):

Location is some specified point on the electricity grids

Time may be specified at quarter hour or above granularity

Oil & Coal:

Location is specified as a port, or group of ports in the trade details - the specific port or docking location is specified later by mutual agreement within the terms of the trade.

Time is usually specified at monthly granularity - the specific dates being agreed later as shipments become clear 

In general:

Gas and power delivery continuously throughout the delivery period, and the delivery volume is often specified as a rate of delivery

Megawatt (MW) for power - remember one MW flowing for one hour is a Megawatt.Hour (MWh)

Therms per day (therms/day) for gas

Oil, coal, LNG and most other commodities are delivered in discrete consignments at mutually agreed points in time during the delivery period



by Nick Henfrey - Monday, 8 June 2015, 5:21 PM

At its simplest the delta of a trade or position is the ratio of its change in value to the change in value of its underlier 


More accurately the delta is the ratio or sensitivity of the change in trade trade value to any variable, market value or observable

For example a simple Physical Forward trade has a sensitivity to:

  • The price of the underlier
  • The interest rate
  • The FX rate of the currency it was executed in to our base reporting currency

So the delta is the ratio of the change in value of the trade per unit volume (e.g. €/MWh) to the change in value of a market value or underlier (e.g. the underlier power price quoted in €/MWh) to give a dimensionless ratio

You may come across a use of Delta as the ratio of the change in total value of the trade (e.g. €) to the change in price of the underlier (e.g. €/MWh) to give a value with units of volume, in this case MWh. This definition of delta is usually referred to as the Exposure, and may also be thought of as the delta above multiplied by the volume

The delta of fixed price Forwards and Futures is about one

The delta of options varies between 0 and 1 (or -1 to +1)

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

Deltas are not additive - because they are dimensionless ratios

Delta is one of the Greeks - usually the most important Greek for trades with no optionality 


Delta Hedge

by Nick Henfrey - Thursday, 19 March 2015, 5:47 PM

To offset the delta of an option or other non-linear trade, usually with a linear derivatives position


If we buy a simple call option, or sell a simple put option, then we may or may not have a long position when the delivery date of the (potentially exercised) contract is made

In reality the option will either get exercised or not - let's say the option is for the delivery of 1,000 MT of coal in January 2016 at ARA (Amsterdam Rotterdam Antwerp location) - we will either have a position of 1,000 MT at that time, or not

On any particular day the option will have a calculable delta, which roughly translates into a probability of the option being exercised:

An option with a delta of 0.01 has a 1% chance of being exercised

An option with a delta of 0.5 has about a 50% chance of being exercised

Traders generally hedge the exposure of the option (which is the delta times the volume), so if the delta is 0.5 they will hedge 500 MT of coal

In general as the option exercise time approaches the delta of the option will swing quite rapidly toward 0 or 1 (or -1) so that the hedge swings toward 1,000 Mt or 0 MT

If you're wondering why an option with a delta of 0.5 (meaning the value of each MT changes by €0.5 for each change in €1 per MT in the value of coal) has a 50% chance of being exercised then think the other way round - if the option was certain to be exercised then its value would change by €1 per MT per change of €1 per MT in the price of coal, so its delta would be one - the delta is effectively the probability of being exercised




by Nick Henfrey - Thursday, 19 March 2015, 6:02 PM

A type of trade or instrument which has a value dependent on an observable value, which is usually, but not always, the price of a physical commodity.

The observable value is called the underlier


Any energy trade type that does not involve immediate delivery is a derivative - because the value of the future delivery varies with the expected price of that commodity at that location at the time of delivery

The only significant exception is a Spot or Prompt trade, which involves immediate, or near immediate delivery




by Nick Henfrey - Thursday, 30 October 2014, 7:31 AM

Calculation of the present day value of a cash flow that will or might occur at some time in the future


Suppose I offered to give you £1,000 right now - you'd be pretty pleased (wouldn't you?! If not imagine it's £10,000,000)

Suppose I guarantee to give you £1,000 in one year's time - you'd also be pleased I guess, but less pleased of course...


Well, for starters if you got it today you could use right away

Even if you wanted to use it in a year's time you'd rather have it now because you could put it in the bank and earn some interest over the next year

Conversely, if you really needed some money now, you could borrow it from a bank and then repay it when I paid you in a year's time

But if you borrowed £1,000 now you'd have to pay interest over the year, so you'd actually end up owing a bit more than £1,000, let's say £1,050

So if you worked out how much interest you would pay, and borrowed an amount, such that the initial amount plus the interest over the next year came to £1,000, then the £1,000 would exactly pay it off

Let's say you did the calculation and it came out that you could borrow £965, the interest on that over the year coming to £35

We could then say that £1,000 in a year's time is equivalent to £965 right now

We call that £965 the discounted value of the £1,000 in a year's time

You can see that the general principle is the discounted value is worked back from the actual value from the expected payment date to today using the expected interest rates

In order to calculate a discounted cash value we need:

The payment date - usually available from the contract terms, or the master agreement

The interest rate curve (for the payment currency or an alternative hedging currency)



by Nick Henfrey - Thursday, 19 March 2015, 6:14 PM

The unhelpful sounding physics definition: Energy is the capacity of a physical system to perform work

We know energy: light, heat, electricity, kinetic (motional) energy, potential (the energy something gets when we lift it up) energy etc.


The initial definition is actually more helpful than it might first appear

In general we are more interested in what energy transitions can do for us than the energy itself

For example electricity is a form of energy - but we are interested in what it can do for us - we can use it to generate heat, run washing machines, pumps etc.

Energy commodities that are themselves not energy contain chemical energy that may be released when we burn them:

  • Gas can be burnt for heat, and to generate electricity
  • Coal can be burnt for heat, and to generate electricity
  • Oil can be burned for heat, and in automobiles and trucks for locomotion

Energy = force x distance

Energy = power x time (or power = energy per unit time)

Physicists measure energy in:

  • Ergs (cgs system, one dyne force acting over one centimetre)
  • Joules (SI unit, one Newton force acting over one metre)

Traders measure energy (most frequently) in



Entry Capacity

by Nick Henfrey - Monday, 10 November 2014, 6:13 PM

Capacity to flow (usually gas) onto a National Transmission System


In order to flow gas on to a Transmission System a shipper needs to have Entry Capacity

Entry Capacity represents a maximum flow rate that gas may be flowed onto a Transmission System over a period, and may be bought in long and short term auctions and traded bilaterally

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