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Detailed Glossary
Detailed Glossary
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Day Ahead | ||
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Trading and pricing for delivery the next day Detail 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 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 | ||
Baseload | ||
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Term used in power (electricity) trading and operations to describe continuous delivery (24 hours a day, 365 days a year) Detail Baseload is the most basic type of power profile Baseload may refer to generation - nuclear power plants provide excellent baseload generation - but cannot easily be switched on or off so are no use for other profiles Baseload may refer to trading - a contract for delivery in 2024 may usually traded as Baseload, Peak or Offpeak Peak and offpeak are related profiles that (as their names suggest) deliver during the set of hours that are defined as peak (e.g. 07:00 - 19:00) or offpeak (e.g. 19:00 - 07:00 the next day) in general Baseload = Peak + Offpeak which is to say if we sell the same volume Peak and Offpeak for the same period then we have effectively sold Baseload If we buy Baseload and sell Offpeak, then we have effectively bought Peak | ||
Discounting | ||
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Calculation of the present day value of a cash flow that will or might occur at some time in the future Detail 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... Why? 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) | ||
Mark to Market | ||
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A way of valuing the unrealized P&L of a simple linear Forward, Futures contract or Swap Detail Most businesses that own assets or hold inventory routinely value those assets and inventory, the change in value between two points in time is the profit or loss Some assets, like computers, simply depreciate, and a simple depreciation percentage is used each year Other assets, like buildings, vary in value with the market conditions, and are generally valued using a mark to market principle (that is we simply look and see what the building is worth at the end of the accounting period) It's important to realize that each trade is an asset (or a liability) - it's a firm contract and must be valued like any other asset The current value of a single trade is the difference between the price paid, and the value of the delivered commodity when it is delivered (which may be a cargo, a day of gas delivery, or a half hour of power delivery) We can find the value of the commodity once it has delivered by looking up the spot trading price on the day of delivery But to value the deal before delivery we must mark the value of the delivered commodity to the market; that is we set the value of the commodity to the price that is currently being paid for the delivery period For example: We have bought 10,000 therms of gas for delivery in March next year at 25p per therm Each day we can look at the average traded price for that month, and mark the value of the 10,000 therms to that price After two days we note that March is trading at 27p a therm, so we mark the physical value to the market price of 27p, and subtract the price we will pay, 25p. The unrealized P&L is therefore £200 ((27p - 25p) * 10,000). Each day we will need to repeat this calculation until the delivery is complete | ||
Curve | ||
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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. Detail 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: | ||
P&L atttribution | ||
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Let's say we added up the P&L of all our trades today, and then did the same tomorrow - the two values would probably be different - but why? Some reasons:
P&L attribution calculates the change in P&L for each of the above individually - and any other factors - so that the effect of each cause may be understood Detail The exact calculation is rather complex, for example if we want to know the effect of new trades, do we value them against yesterday's curve price or today's? If we use today's then in effect we have partially attributed some P&L change to the new curve price In general the P&L of each trade, or a netted exposure across a portfolio is is recalculated individually for each change that might affect the p&l (forward curve, fx rates etc), keeping each other effect constant Because each change is taken in isolation the the sum of all P&L attribution detail does not add up to the overall change in P&L... P&L attribution is often called P&L explained or P&L explainer | ||
Entry Capacity | ||
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Capacity to flow (usually gas) onto a National Transmission System Detail 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 | ||
Tolling Agreement | ||
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A general term used to describe an agreement in which one party (the toller) provides an input product to the other party, and the other party provides another product (usually derived from the input product) in return Detail In the energy sector tolling agreements may cover:
In effect a tolling agreement is a physically implemented spread | ||
Line Loss | ||
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When transmitting Electricity via Interconnector, some of the power is lost and thats called Line Loss. For UK-FR interconnector line loss factor is 1.17% | ||