Dark Energy Consulting
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Detailed Glossary
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Energy | ||
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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:
Energy = force x distance Energy = power x time (or power = energy per unit time) Physicists measure energy in:
Traders measure energy (most frequently) in
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Entry Capacity | ||
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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 | ||
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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 | ||
Exchange for Physical | ||
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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
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Execution | ||
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Exposure | ||
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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:
Exposures are additive - they can be summed across a set of trades or portfolios Deltas are not additive - because they are dimensionless ratios | ||