Detailed Glossary

A Detailed Glossary of Energy Trading terms for registered users

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Front Month

by Nick Henfrey - Thursday, 26 March 2015, 7:07 AM

The earliest tradable month of a particular contract - normally a Futures contract


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


Futures Contract

by Nick Henfrey - Tuesday, 3 June 2014, 7:38 AM

A Futures Contract is an agreement to buy or sell a commodity at a fixed time in the future executed on or with an Exchange


Note the similarity in description to a Forward Contract

We will focus mainly on the differences

Exchanges list standardized products that may be traded. A product describes a standardized commodity, delivery period and delivery location that may be traded

Exchanges list a buy and a sell price for every different product they list. These buy and sell prices are provided by Market Makers

Futures Contracts are always cleared

Futures Contracts may be physically or financially settled

A financially settled futures contract may be taken into the delivery period, and is settled by daily margining at the daily fixed in price

If you're wondering how that is different to an exchange-traded swap - then the difference is a swap is very like a financially settled futures contract, but the swap is generally not daily margined




by Nick Henfrey - Thursday, 26 March 2015, 7:11 AM

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


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/€


General Ledger

by Nick Henfrey - Thursday, 26 March 2015, 7:12 AM

A record of all financial transactions made by the company


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



Give Up

by Nick Henfrey - Thursday, 26 March 2015, 7:13 AM

A give up is an OTC trade - usually a forward - given up to an Exchange for clearing 


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



by Nick Henfrey - Thursday, 26 March 2015, 7:16 AM

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


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




by Nick Henfrey - Thursday, 26 March 2015, 7:23 AM

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


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)




by Nick Henfrey - Thursday, 26 March 2015, 7:24 AM

An Index is a set of prices that are published for a commodity or product, usually derived from trading data, using an open and independent method


An index consists of a set of time periods, with an associated price (or set of prices) for a particular commodity or product for each of the time periods:

The time periods are sometimes called grid points (or gridpoints)

A typical index has daily granularity forward from the date it is published for a number of days, then monthly for some months, then quarterly, seasonal and annual

For each time period there may be a bid price, an offer price, and an average (mean) price

Indexes are usually published at the end of each trading day, and represent some sort of average of the prices that Forward and Futures contracts actually traded at on that day (or for a pre-defined period of the day)

Various organizations publish indexes for different commodities and products:

Exchanges publish indexes for the various products they offer

Independent analysts publish indexes for commodities in markets they specialize

Trading organizations use indexes to:

Derive forward (valuation) curves

Fix in floating prices of floating price trades

Agree forward valuation of trade portfolios with counterparties for netting agreements

There is some similarity between indexes and curves since they are both sets of time-series data. The main differences are:

Indexes are published by independent organizations, and are available to any organization that wishes to subscribe to them

Indexes only relate to prices of commodities and products

Curves are usually created by, and proprietary to, the trading organizations that create them

Curves consist of any time-series data, including valuation, volatility, interest rates etc.




Indexed Forward

by Nick Henfrey - Wednesday, 27 August 2014, 7:41 AM

A type of Forward contract that is physically delivered and settled at a price derived from a published index


See Forward contract



by Nick Henfrey - Wednesday, 3 September 2014, 5:29 PM

Term used to describe transferring natural gas from a transmission network into a storage facility


Injection volumes are nominated in the same way as other physical gas movements

Injecting gas into a storage facility requires the organization to have available storage capacity

See also Storage for more details

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