## Detailed Glossary

A Detailed Glossary of Energy Trading terms for registered users

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### E

#### Energy

The unhelpful sounding physics definition: Energy is the capacity of a physical system to perform work

We know energy: light, heat, electricity, kinetic (motional) energy, potential (the energy something gets when we lift it up) energy etc.

Detail

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:

• Gas can be burnt for heat, and to generate electricity
• Coal can be burnt for heat, and to generate electricity
• Oil can be burned for heat, and in automobiles and trucks for locomotion

Energy = force x distance

Energy = power x time (or power = energy per unit time)

Physicists measure energy in:

• Ergs (cgs system, one dyne force acting over one centimetre)
• Joules (SI unit, one Newton force acting over one metre)

Traders measure energy (most frequently) in

#### Entry Capacity

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

#### ETRM

Energy Trading and Risk Management - usually referring to a computer system that allows trades to be electronically recorded, and risk measures to be calculated

#### Exchange

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 - Forward trades for Prompt delivery (today, tomorrow - day ahead, and sometimes for the forthcoming weekend
• Futures - Contracts for future delivery, usually weeks, months, quarters, seasons and years, in standardized volumes or rates (e.g. therms per day, Megawatts, Tonnes)
• Swaps - Financially settled Contracts in the future, usually between a fixed price and an index, or between two indexes
• Options - Options on standardized contracts for future delivery, offered at a trade price or premium, with a range of strike prices, puts and calls, expiry dates and delivery dates

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

 Keyword(s): Exchanges

#### Exchange for Physical

Convert an Exchange Futures position to a physical position either with an OTC counterparty, or with the Exchange itself

Detail

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"

Other Futures contracts do not necessarily contractually go physical, or you may want to exchange your regular Futures position for physical before the expiry date, or under different terms

in these cases you may contact the exchange and request an Exchange for Physical - the Exchange will attempt to match you up with another party who wishes to take their opposite position to physical

alternatively you may arrange off the Exchange to Exchange for Physical with another party, and then both contact the Exchange to  notify them

In general, Exchange for Physical is an expensive process, it is usually simpler to close out the Futures position on the Exchange and open an equivalent OTC position on a broker platform

 Keyword(s): EfPExchange-for-physical

#### Execution

In trading terms execution is the act that makes a trade a legally binding contract between the trading parties

Detail

A trade may get executed in a number of different ways:

 Keyword(s): executedexecuteexecutesexecutes

#### Exposure

Exposure is the sensitivity of the value of a trade, or a portfolio, to some market variable

A single trade may have Exposure to multiple market variables, and we measure the Exposure to each variable separately.

In general there is an Exposure to each independent market variable that determines the value of the trade

Detail

Consider a simple Physical fixed price Forward delivering in a year's time

There is an Exposure to the commodity underlier, let's say a Coal value

The Exposure is the shift in value of the trade with each unit shift in the price (or value) of the underlier

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

100 whats?

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!

If you've looked at the definition of Delta you will have seen that Delta is properly the change in value per unit of the trade per change in value per unit of the underlier

So we get the important formula Exposure = Position * Delta

A trade may have multiple deltas and multiple Exposures - our simple Forward deal may not be as simple as we think:

• There is a Delta and Exposure to the value of coal
• If we want to know the current value of the trade then there is a Delta and Exposure to the interest rate
• If we are a European trading organization and we want to know the value of our trade in Euros then there is a Delta and an Exposure to the FX rate between Dollars and Euros - the FX Exposure

Exposures are additive - they can be summed across a set of trades or portfolios

Deltas are not additive - because they are dimensionless ratios

 Keyword(s): Exposures