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Detailed Glossary
Detailed Glossary
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Order | ||
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An Order is an instruction sent to an Exchange or a Broker to execute a trade unconditionally, or when or if specific criteria are met Detail A Market Order is the simplest, unconditional, type of Order. It is a simple instruction to buy or sell a specific volume of a product or commodity to be executed immediately at the best price available A Limit Order is an instruction to buy or sell a specific volume of a product or commodity if the price of execution is at or better than the Limit Price specified with the Order An Order may combine, in a single instruction, a number of transactions that are required A Fill or Kill Order requires all transactions to be carried out, or none. Partial execution is not permitted Exchanges handle all types of Order internally Other organizations or parts of organizations may accept combination Orders, and then route different parts of the Order to different Exchanges, Brokers or other parts of the organization For example a large trading organization may have several desks issuing Orders that overlap. An internal order routing capability matches internal orders as far as possible before routing the unmatched orders to external organizations (brokers or exchanges) Bids and Offers are types of Order
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Volume | ||
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Volume is the measure of how much of something is involved in a trade Volume = Quantity (but the term Volume is nearly always used in preference) Hence in energy trading volume may have dimensions of energy, mass, weight or volume Detail Volume is one of the important attributes of a trade Volume may be specified: As a total for the entire trade By day, month or some other period for the duration of the trade Volume has units of quantity according to the commodity: Mass (often incorrectly called weight) - often used for coal, oil and other non-gaseous commodities e.g. metric tonne (T), kilogrammes (kg) Volume - sometimes used for gaseous and liquid commodities millions cubic feet (mcf), barrels (bbl), gallons Energy - may be used for any commodity e.g. therms, Megawatt hours (MWh) For gas and electricity trades it is generally more convenient to trade in quantities of energy Other energy commodities are usually measured in volumes of mass or volume since this is more practical to measure at delivery Volume traded will directly affect the traded position of that commodity Volume may be constant over the duration of the trade, or may vary over the different delivery periods: the delivery volumes are defined in the Schedule of the trade
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Hedge | ||
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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) | ||
Master Agreement | ||
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When two parties execute a trade between themselves they specify the terms of the trade: Price, Volume, Location, timing etc. But in order to successfully manage the trade's delivery and settlement a lot more information needs to be available than is captured in the trade details, such as when payment is due, who needs to notify a TSO etc. This additional detail is held in a Master Agreement Each trade that is executed is regulated by a Master Agreement Detail Master Agreements exist to cover various sorts of trade, for example the UK standard gas and power Master Agreements : GTMA (Grid Trading Master Agreement) covers UK power trading, complete with all the details of notification NBP97 (Short Term Flat NBP Trading Terms and Conditions Ref. NBP 1997) covers natural gas trading at the NBP complete with details of nomination Master Agreements may reference other Master Agreements - ISDA for example is an organization that is aiming to offer master agreements that unify trading, for example at the NBP and at TTF Master Agreements are themselves referenced by bilateral trading agreements, which are agreements set up by pairs of potential trading partners to specify which Master Agreements will be used for different products and instruments, and usually cover other arrangements such as netting, collateral etc. Master Agreements may have schedules or annexes that define additional terms, or override terms in the main agreement Bilateral Master Agreements may have additional schedules that define variations to the standardized master agreements A Confirmation, as well as confirming the trade details, also confirms the master agreements that regulate the trade, and may itself contain exceptions or variations from the general bilateral terms
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Storage | ||
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A type of commodity, which although it may be applied to any physical commodity, usually describes the ability to store natural gas in its gaseous state Storage facilities usually consist of natural structures (depleted gas fields for example) that are attached to the gas pipeline network Details Storage may be bought from the Storage operators in auctions or traded Storage allows the option to inject gas into storage, or release gas from storage The commercial use of storage is generally to allow gas to be transferred into Storage (injected) in Summer months when the prices are low, and released (withdrawn) in the peak Winter months when gas prices are high Storage behaves somewhat like an option on a physically settled time spread | ||
Trade | ||
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A trade is a legally binding contract between two parties A physically settled trade requires one party to deliver one or more commodities to the other party at a time and location specified in the trade terms, in return for one or more cash payments A financially settled trade requires both parties to agree the value of one or more underliers, and make one or more cash payments dependent on those values In general, trades have the following dimensional attributes Delivery period Trades also have the following non-dimensional attributes Price See also Execution | ||
Floating | ||
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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 | ||
Asset | ||
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In energy trading terms an asset is something an organization owns that can physically provide, transform or move an energy commodity, such as a gas field, a power station, or a refinery Detail In trading terms many assets that transform or help to move a commodity are in effect an option on a spread:
Long term supply contracts are also sometimes referred to as an asset | ||
Delta | ||
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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 Detail 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:
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 | ||
Blotter | ||
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A Blotter is a traditional term for a form on which trade details are recorded by a trader as trades are executed Detail Original blotters were pre-printed forms with a row for each trade, in which the trader wrote by hand the trade details in defined columns Traders often use a spreadsheet to capture trade details as a form of electronic blotter Trade details from blotters are either subsequently re-keyed into a trade record system (ETRM), or may be electronically uploaded into an ETRM Many ETRMs have trade blotters built into them to allow trades to be recorded directly as they are executed Deal ticket is a similar term for a pre-printed form on which trade details are recorded. Typically a blotter allows one trade per line to be recorded, whereas a deal ticket - designed for more complex trades - usually has one trade per page
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