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Detailed Glossary
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Greek | ||
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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: 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 | ||
Give Up | ||
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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 | ||
General Ledger | ||
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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:
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
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Gamma | ||
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Gamma is one of the market risk Greeks It measures the sensitivity of the Delta to an underlier or market value It is of use when the value of the Delta itself varies with the value of the underlier - the Delta being the ratio of the value of the trade or portfolio to the value of an underlier or market value Detail A Physical Forward has a delta of approximately one with respect to the physical underlier, that is the value of a trade increases by 1% for every 1% increase in the underlier By contrast an Option may have a delta of anywhere between -1 and +1, and the delta is not constant At an underlier price of $20/tonne an Option might have a delta of 0.1, but at $40/tonne the delta might be 0.5 Trades with deltas that are constant are called linear (if we were to plot a graph of value against underlier it would be a straight line, the slope is the delta) Trades with deltas that change with the value of an underlier are called non-linear (if we were to plot a graph of value against underlier it would be not be straight - the gamma is the measure of curvature of the plot at a particular point on the graph) As an analogy think of delta as speed, it is the ratio of distance to time. Gamma is acceleration, just knowing the speed of an object doesn't tell us whether it is braking hard, accelerating, or at uniform speed - for that we need the acceleration Because gamma is the change in delta per unit change of price per unit volume of commodity and delta is dimensionless then Gamma has units of 1 / (Price/Volume) = Volume/Price, e.g. Therms/$ Some ETRMs use the term Gamma for the change in Exposure per unit change of price per unit volume of commodity and get Volume / (Price/Volume) = Volume2/Price e.g. MWh2/€ | ||
Front Month | ||
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The earliest tradable month of a particular contract - normally a Futures contract Detail It's easiest to give an example: A March monthly contract may be tradable up to the 25th of February On 25th February the Front Month would be March On the 26th February the Front Month would be April Contracts beyond the Front Month are sometimes called Back Months | ||
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 | ||
Fee | ||
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A fee is a cash payment which may be associated with:
Detail Fees are usually cash payments that are not directly related to delivery of a commodity There are four general categories of fees:
Fees booked against trades are generally associated with a cash flow type, so that they can be correctly allocated in P&L, invoicing and general ledger accounting | ||
Novation | ||
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A generic legal term for transferring existing contracts from one legal entity to another Detail A legal entity may agree with another legal entity to transfer all, or a subset of, its contracts to another legal entity Each company that the original legal entity has contracts is notified, and a novation is agreed: that is our organization agrees to novate our contracts from the first legal entity to to the other on a particular, mutually agreed, date amongst the contracts novated will be any long term contracts, master agreements and any trades Trade novation has to be reflected in our ETRMs, and the following convention is usually followed:
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Delivery | ||
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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 Detail The act of physical delivery is made in different ways according to the commodity: Gas: 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 | ||
Exchange | ||
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An Exchange is a trading organization which matches bids and offers on standardized contracts to form trades. Unlike a Broker the Exchange acts as the counterparty for the trades, and trading is anonymous Detail An Exchange offers standardized contracts, normally
Spots are delivered and settled in a matter of days - settlement occurring through movement of funds held in a cash account Futures may be physically or financially settled - credit risk is reduced through daily margining. Physically settled Futures are either converted to equivalent Spots at expiry, or alternative physical delivery is agreed between partners Swaps are always financially settled through margining Options, like OTC options, have a defined expiry date, at which time they or may not be exercised, usually into the corresponding exchange traded Futures | ||