Detailed Glossary

A Detailed Glossary of Energy Trading terms for registered users

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Portfolio

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

Settlement

The Business Process or Capability covering the payments relating to trading activities. It includes agreeing payments, making them, and ensuring that payments are received at the correct times

Detail

Settlement includes:

We also referred to the concept of financial and physical settlement of trades

We need to be careful to recognize the legal definition of settlement of a physical trade:

Most other parts of energy trading businesses identify the term settlement with cash settlement (or payment)

 Keyword(s): settledsettle

Shape

Shape is a term, mainly used in Power Trading to describe a non-continuous delivery over a delivery period

For example a UK power trade may have a delivery period of a month and have peak shape, which specifies that the power will be delivered over a time period of 07:00 - 23:00 each day of the Month

Detail

Typical shapes include

• Peak - peak daytime hours
• Offpeak - non-peak hours
• Extended peak - longer hours than peak
• Blocks - in the UK the day is divided into six four-hour blocks starting at 23:00, Various combinations of these blocks may be traded (note that peak is blocks 3-6)
• Weekday - Weekdays that are not National Holidays
• Weekend - non-weekdays
• Combinations of weekday and weekend and one of the others (e.g. WD345 is blocks 3,4 and 5 on weekdays only)

Shape in Power delivery is usually referred to as Profile

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

 Keyword(s): Positions

Broker

A broker acts as an intermediary in the trading process

Most energy execution brokers operate a trading platform, that allow Orders to be submitted on a variety of standardized trading Products or Instruments

When Orders are matched then a trade is executed, and the parties making the matched Bid and Offer are each notified that a trade has been executed

The trade is legally executed between the respective parties

Detail

There are three types of brokers commonly involved in energy trading:

• Execution Brokers - usually operating an electronic platform - brokering OTC trades
• Exchange Brokers - Act as broker for trading companies on Exchanges on which the trading organization is not a full member
• Clearing Brokers - Clear trades executed on an Exchange on behalf of the trading organization
Generally all brokers charge a fee, usually based on the total volume of the trade
 Keyword(s): Brokersbrokeredbrokerage

Realization

The p&l of trades (and cash flows) is described as:

Detail

Most trades involve delivery at some point in the future

Because the value of the commodity to be delivered is not known before the delivery, the value needs to be estimated or calculated from market data.

For forwards and futures and other linear trade types the value may be estimated by a simple mark to market calculation

For options and other non-linear trades the value may be calculated using the Black 76 method (derived from the earlier Black-Scholes method)

We say the trade's value (its p&l) is unrealized because it is not yet known for certain, and is therefore a cause of market risk

Once delivery has taken place, we know (or don't care about) the delivered value, the value of he trade is known and no longer varies. In effect the p&l is locked in, there is no more market risk associated with this trade and the p&l is said to be realized

The p&l of a trade (or cash flow) moves from unrealized to realized when one or more of the following conditions has been met

• Delivery has taken place
• Payment has taken place
• Some time after one of the previous conditions

Realization is the set of business rules that defines when p&l moves from unrealized to realized based on:

Realization is subjective: different organizations may have different business rules to determine realization

 Keyword(s): unrealizedrealizedunrealisedrealised

Theta

The value of options varies with time, in general the uncertainty in the price of the underlier reduces as the moment of exercise approaches. Theta is the measure of how much the value of a trade, or set of trades, varies with time

Detail

Theta is one of the Greeks that measure sensitivity of the value of a trade or portfolio to the passage of time

Like most Greeks, except Delta, it is zero for linear trades (trades with no optionality)

Accrual

A known future cash flow that has not been invoiced

Detail

This term is a perfectly standard accounting term.

Accruals commence at the time of delivery and continue until an invoice is raised, or an invoice is received

For continuously delivered commodities (gas and power), accruals build up over the delivery month, day by day, and continue until an invoice is generated or received early the next month

Accruals are posted to the General Ledger, and are reversed out when an invoice is posted

Unrealized P&L is not accrued - only delivered (and therefore usually realized) P&L is accrued

 Keyword(s): accruedaccruals

APAR

Accounts Payable/Accounts Receivable

Anything relating to these two departments, that is:

• receiving, checking and paying invoices (Accounts Payable)
• raising, sending and chasing payment of invoices (Accounts Receivable)

Often used to refer to invoices and invoiced cash flows

Detail

In general the Master Agreement of a trade determines the agreed invoicing cycle and dates

A typical invoicing cycle would be to invoice a month's worth of delivery on the 5th day of the following month

Our organization must raise invoices, and may raise shadow invoices or purchase orders to match against invoices received from our counterparties

Once sent, an invoice cannot be deleted or just ignored, but it can be reversed by issuing a credit note. A credit note reverses part of, or a whole invoice

Equally a debit note may be raised to reverse part of, or all of, a shadow invoice or purchase order. This should match a credit note that our counterparty will send to us

The set of invoices, shadow invoices and purchase orders, credit notes and debit notes, and the cash flows held in them may be collectively referred to as APAR

 Keyword(s): Accounts PayableAccounts Receivable

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:

• There is a Delta and Exposure to the value of coal
• If we want to know the current value of the trade then there is a Delta and Exposure to the interest rate
• If we are a European trading organization and we want to know the value of our trade in Euros then there is a Delta and an Exposure to the FX rate between Dollars and Euros - the FX Exposure

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

Deltas are not additive - because they are dimensionless ratios

 Keyword(s): Exposures

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