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We know energy: light, heat, electricity, kinetic (motional) energy, potential (the energy something gets when we lift it up) energy etc.
The initial definition is actually more helpful than it might first appear
In general we are more interested in what energy transitions can do for us than the energy itself
For example electricity is a form of energy - but we are interested in what it can do for us - we can use it to generate heat, run washing machines, pumps etc.
Energy commodities that are themselves not energy contain chemical energy that may be released when we burn them:
Energy = force x distance
Physicists measure energy in:
Traders measure energy (most frequently) in
Capacity to flow (usually gas) onto a National Transmission System
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
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
An Exchange offers standardized contracts, normally
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
Exchange for Physical
Classic Futures contracts are settled physically: if you are long 2,000 pork bellies for delivery in May 2018 then, when the contract expires, the Exchange will arrange for one or more parties that are short those pork bellies to make delivery to you at the location, time and price specified in the Futures contract
we don't usually call this Exchange for Physical, since it is the contracted outcome of the Futures contract. The Exchange usually just calls this "Delivery", it is is also known as "Take to Physical" or "Cascade to physical"
A trade may get executed in a number of different ways:
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
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!
Exposures are additive - they can be summed across a set of trades or portfolios
Deltas are not additive - because they are dimensionless ratios