Detailed Glossary of Energy Trading terms

A record of all financial transactions made by the company

Detail

Usually represented by computer software the general ledger is a record of all transactions made by the company

In the trading context transactions occur when any event occurs that may cause a transaction:

• A trade is executed
• A trade is revalued
• A trade delivers
• An invoice is raised or received
• A cash payment is made or received

Transactions are represented, in double entry book keeping, as debits on one or more accounts and credits on one or more account - the debits always matching the credits for a specific transaction

Being able to assign p&l and cash flow events to general ledger accounts is a critical part of any end to end trading system

A give up is an OTC trade - usually a forward - given up to an Exchange for clearing 

Detail

A give up may start life as an OTC bilateral trade which, by mutual agreement, is given up to an Exchange to take advantage of clearing

The give up may also be:

a brokered OTC Forward that is mutually given up for clearing

traded as an Exchange Derivative on a Broker platform, and automatically be given up for clearing

Giving up an OTC trade for clearing combines the flexibility of trading bilaterally or through a broker, with the risk-free credit benefits of cleared trades

The Greeks are a set of Market Risk measures, using Greek (or Greek-like) letters to measure sensitivities of a trade or portfolio to the set of factors that affect the value of the trade or portfolio

Detail

For more detail see the individual glossary entries for:

• Delta
• Gamma
• Rho
• Theta
• Vega

If you remember your Greek from school you'll already have spotted that Vega is not a Greek letter at all, just a word beginning with "V" that sounds faintly like a Greek letter

To hedge is to offset, mitigate or reduce a risk or risks of an organization or individual by entering into contracts or trades

A hedge is a trade or contract intended at least partly to reduce risk

In Energy Trading the risk is usually market risk associated with other trades or contracts, or the operation of assets

Detail

Let's consider a very simple example

Our organization buys oil for delivery next year, because it believes the price next year will be less than the strike price (the price we will pay for it). We're taking a risk we understand. But the strike price is in US Dollars (USD) so shortly after the delivery takes place we will have to pay for the delivery in USD (or the equivalent in another currency at the delivery time)

We operate in GBP, but we don't know what the GBP price will be until delivery - so there is a risk the USD/GBP FX rate will move against us before delivery

We call this risk FX exposure to US dollars

We're not interested in currency speculation, so we buy the required USD now at the forward FX rate

Now we have no risk associated with FX exposure

We have hedged our FX exposure

Hedging is usually carried out with Derivatives. In our example above we could have bought the dollars immediately, but then we would be exposed to the USD interest rates, so it's more likely we would hedge with a Forward contract or a Futures contract

Hedging is frequently carried out with financially settled instruments: the profit or loss we make on the hedge offsets any additional cost of the physical trade

See also Hedge Accounting and Delta Hedging which are related

Another useful way to think of a hedge is a means of realizing a profit-making strategy (profit-making strategies invariably being associated with risk!). If we think we will make a profit bidding on capacity through a pipeline, then the hedges would be the deals to buy at the cheaper location and sell at the more expensive location

By this extension we can also say that hedging a position is a way of saying flattening the position (for example of a book) by trading the position to somewhere else (for example another book, or externally)

An Index is a set of prices that are published for a commodity or product, usually derived from trading data, using an open and independent method

Detail

An index consists of a set of time periods, with an associated price (or set of prices) for a particular commodity or product for each of the time periods:

The time periods are sometimes called grid points (or gridpoints)

A typical index has daily granularity forward from the date it is published for a number of days, then monthly for some months, then quarterly, seasonal and annual

For each time period there may be a bid price, an offer price, and an average (mean) price

Indexes are usually published at the end of each trading day, and represent some sort of average of the prices that Forward and Futures contracts actually traded at on that day (or for a pre-defined period of the day)

Various organizations publish indexes for different commodities and products:

Exchanges publish indexes for the various products they offer

Independent analysts publish indexes for commodities in markets they specialize

Trading organizations use indexes to:

Derive forward (valuation) curves

Fix in floating prices of floating price trades

Agree forward valuation of trade portfolios with counterparties for netting agreements

There is some similarity between indexes and curves since they are both sets of time-series data. The main differences are:

Indexes are published by independent organizations, and are available to any organization that wishes to subscribe to them

Indexes only relate to prices of commodities and products

Curves are usually created by, and proprietary to, the trading organizations that create them

Curves consist of any time-series data, including valuation, volatility, interest rates etc.

A type of Forward contract that is physically delivered and settled at a price derived from a published index

Detail

See Forward contract

Term used to describe transferring natural gas from a transmission network into a storage facility

Detail

Injection volumes are nominated in the same way as other physical gas movements

Injecting gas into a storage facility requires the organization to have available storage capacity

See also Storage for more details

At its most abstract an Instrument is a category of trade types

Detail

It is difficult to define Instrument further than this, because the term is used differently between organizations, functions within organizations, and trading systems

A typical instrument may have dimensional attributes of:

• Trade type
• Commodity
• Settlement type (physical or financial)
• Maybe tenor (day, week, month etc.)
• Maybe market/location

So, examples of Instruments may be

• Physical Forward 
• UK Power Swap
• API#4 Coal Futures

Note the similarity and differences to a Product

Note that some proprietary systems make a very specific use of the term Instrument

A gas or power connection between two different locations

Usually used to flow gas or power from a lower priced location to a higher priced location

Detail

Interconnectors consist of either a pipe, or cable connecting two hubs or grids

For a trading company the process of flowing gas or power from one location to another goes as follows:

Procure capacity on the interconnector

This may be through an auction, mainly annual and day ahead, or in some cases through a secondary market (i.e. buying or selling capacity to other organizations)

Capacity is usually bought in flow rate units (e.g. Nm³/hour for gas, MW for power) over a period of days, a month, quarter, years etc.

Capacity on an interconnector is much like an option on a location spread

Capacity gives the right, but not the obligation, to flow gas or power from one location to another

Transmission

In order to use the capacity the trading organization needs to nominate transmission of gas or power to the TSO

Let's say we have a long term capacity contract to flow power from the France to the UK through the IFA

Noticing the price of power is less in France than in the UK so we nominate to the TSO that we will flow power (up to the capacity flow rate), using the capacity. 

We normally book this as a trade in our ETRM, but there is no change of title - this is an internal trade

We usually book this trade at a fair market price to keep P&L shifting between locations

Obviously we need to hedge this with an appropriate long position in France (we buy the power in France) and a short position in UK (we sell the power in UK)

Like most businesses, we sell something, we deliver it, we raise an invoice, we send it to our buyer, we get paid - we hope.

The Master Agreement between us and our counterparty will specify if we raise an invoice for a specific delivery (of oil for example), or for a continuously delivered commodity (gas or power for example) over a period (usually a day, week or month)

Detail

The two main invoicing schedules are:

• Monthly - all of the commodity that has delivered to a counterparty at a location in the last month is invoiced shortly after the end of the month. The invoice will include all trades that have delivered during the calendar month. Trades delivering over multiple months will appear on successive invoices. Each invoice will only relate to the delivery of each trade within that month
• Delivery - typically oil is invoiced a few days after a physical shipment has occurred

Invoices usually have the following granularity:

• Delivery period or delivery
• Commodity
• Currency
• Location
• Counterparty (of course!)

We may therefore raise a number of invoices for a counterparty, with different combinations of the above

Once we generate, or raise, an invoice, and are satisfied that it is correct, we transmit the invoice(s) to our counterparty, and we post the invoice(s) into an Account in our General Ledger

We expect our counterparty to be doing the same for commodities that we have bought from them, and expect to receive invoice(s) that we will check against our own records

To help this we raise a set of shadow invoices, or purchase orders, so that we can compare these to the invoices received from our counterparty. Once agreed we post these purchase orders into an Account in our General Ledger