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Detailed Glossary
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Realization | ||
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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
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 | ||
Broker | ||
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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.
Detail
There are three types of brokers commonly involved in energy trading:
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Position | ||
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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 Each time a trade is executed the trader's net position changes. Most traders update their net position as each trade is executed | ||
Shape | ||
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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
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Settlement | ||
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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) | ||
Portfolio | ||
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A group of trades 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 | ||
Book | ||
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A book is a collection of trades, usually grouped by a trading strategy Detail Note the similarity to a portfolio, the two terms are often used interchangeably, and sometimes together, in which case a book is usually a grouping of portfolios | ||
Forward | ||
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A Forward, or Forward Contract, is an agreement to buy or sell a commodity at a fixed time in the future Details A Forward Contract involves two trading parties: a buyer and a seller. Our organization is one party, the other is the counterparty A Forward Contract can involve almost any terms for quantity (Volume), quality, commodity, delivery period, delivery location, pricing and settlement A Forward Contract may be executed directly with a counterparty, or through an intermediary (a broker) Whether brokered or not, responsibility for delivery and settlement of a Forward Contract is usually directly with the counterparty (see Clearing for an exception) Forward Contracts may be executed at a fixed price, or at a floating price:
Forward contracts may be physically or financially settled:
A financially settled Forward is often referred to as a swap A Forward is usually settled bilaterally between parties. Forwards may be included in a netting agreement Forwards may be included in a margining agreement A Forward may be given up for clearing
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Location | ||
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Location is one of the key dimensional attributes of all physically settled, and many financially settled, trades Detail Location is usually a description of where the delivery a of a trade will take place Although this sounds fairly straightforward, in practice location means different things for different commodities. This is because the delivery location simply defines the lowest level of distinguishable information about the delivery, and this lowest level varies with the commodity So let's look at some commodity locations to see what this means: Natural Gas The location of the majority of gas trades in the UK is the NBP The NBP isn't even a real location, it describes the UK-wide gas pipeline network called the National Balancing Point On the day of delivery, a seller of gas has an obligation to deliver gas at the NBP The seller may deliver it from any other location that is physically connected to the NBP, it doesn't matter where that is. The buyer may take delivery to any other location that is physically connected to the NBP Gas traded locations such as the NBP are called hubs. Some hubs require the buyer and seller to identify the physical connection point of delivery - these are physical hubs Other hubs, like the NBP do not require the buyer and seller to identify the connection point - these are virtual hubs | ||
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 | ||