Detailed Glossary

A Detailed Glossary of Energy Trading terms for registered users

Browse the glossary using this index

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z | ALL




by Nick Henfrey - Monday, 13 April 2015, 5:46 PM

Profit and Loss (P&L) is a finance and risk reporting term to describe the profitability of an individual trade, a book, a desk, or a company. Whilst the P&L of a company includes all activity, and costs (offices, staff etc.) the trading P&L is a measure of the profitability of a single, or a set of, trade(s)


P&L is a change in the value of something, or a set of things between two points in time

You will often hear people refer to the P&L of the trade in terms of its value - the value at any point in time is effectively the difference between the value at that point in time, and the value before the trade was executed. We usually refer to this as the Lifetime to Date P&L or LTD P&L

Often we are interested in the change in value, the P&L, from the start of the year, from the start of the month, or from the last valuation. These are respectively known as:

  • Year to Date P&L (YtD)
  • Month to Date P&L (MtD)
  • Change on day P&L (CoD or DtD) 

As an example, let's say we bought some shares in a company for £60, and a year later we sold them for £100, then it seems obvious that we made £40 profit, assuming there were no cost of buying the shares, or selling them, nor indeed any other costs directly associated with the buying or selling

From the trading point of view we have executed two deals, or trades. Let's now think a bit more about these two trades, and ask some further questions:
We know the P&L after both trades have been executed (£40) but:
  • What was the P&L after the first trade?
  • What was the P&L of each individual trade?
Before continuing we will align our example with a more normal energy trading example.
In general traders don't buy a commodity, and then sell it later because of the difficulty and cost of storing energy commodities - see Storage
In general traders enter into a Forward contract, that is to buy the shares at  fixed time in the future, at a fixed price
The other advantage of Forward contracts is that the trader can enter a Forward contract to sell, as well as buy, at some time in the future. This is known as taking a short - i.e. negative - position
In the first trade:
We enter into a Forward contract to buy an amount of shares for £60 in March 2018
In March 2018 we will give £60 to the seller of the shares. This is called the financial side or leg of the trade. It has a known cash value: £60
The seller will give us (he will deliver) the shares. We don't know what they will be worth then, but we can look up the current expected market value of the shares in March 2018, and see what they're worth - see MtM for the details. We call this marking to market, or MtM. Let's say we go online and the market value is £58, then at that time the P&L of the trade is minus £2, we have made a loss. Each day a new price is published we should revalue our trade, and this should continue until the shares are delivered. We have a long position in this share until we sell it. We say the trade has an unrealized P&L of minus £2. We say it is unrealized, because we still have the contract to buy the shares and their value (to us) will continue to vary until we receive them
We call this the physical side or leg (it's physical because it's not cash, even though the share certificates are electronic, we still call this physical)
After ten months we note that the market price has risen to £110, the trade has a P&L of £50, the current physical side value of £110 less the cash or financial side of £60. We say the trade has an unrealized P&L of £50
In March 2018, our seller delivers the trades, and we give the seller £60. We note that the market price has dropped to £100, the trade has a P&L of £40, the current physical side value of £100 less the cash or financial side of £60. We say the trade has an unrealized P&L of £40
We decide to immediately execute the second trade and sell the shares for £100, by then the spot price, and execute a sell transaction
Between the two trades we can say that the P&L is £40 and that it is now realized. We can say the P&L is realized based on three criteria:
In general, with derivatives, these criteria are usually not met simultaneously, and realization may be defined according to one or more of these criteria, and may be dependent on other criteria as well
We have said the P&L of the two trades is £40, but what is the P&L of each individual trade? There are two general ways to define this:
  1. Ignore the physical side of each trade, so the first trade has a P&L of minus £60, the second trade has a p&l of £100, between them the P&L is £40. We can use this method when we are sure that the position of both trades has been closed out (which is another way of saying that the two trades' net position is zero). This method is sometimes called realized cash flow because it only considers the value of the cash elements of the trades
  2. Retain the physical side of each trade, and continue to mark it to market for each trade. By this method the realized P&L on the day the second trade was executed was £40, and the P&L of the second trade is zero. If we use this method the P&L of each individual trade will continue to fluctuate for as long as we use it. This method is sometimes called Realized MtM
In general the first method is preferred because it is simpler, we may have to use the second method when we are not sure the position is entirely closed out, or we know some is, and some isn't.
if the first method sounds odd, think about buying and selling a house, once you've bought a house you're very interested in how much you paid for it, and how much it's currently worth. Once you sell it however, you're only really interested in the price you paid and the price you sold it. You have little real interest in the current price
P&L that may result in a cash flow in the future is often discounted back to present day value
We may refer to undiscounted, and discounted P&L



P&L atttribution

by Nick Henfrey - Thursday, 6 November 2014, 7:29 AM

Let's say we added up the P&L of all our trades today, and then did the same tomorrow - the two values would probably be different - but why?

Some reasons:

  • We booked some new trades
  • The forward curve price changed
  • The FX rate we use to give reporting currency P&L changed
  • The discounting factor changed
  • Some trades were amended

P&L attribution calculates the change in P&L for each of the above individually - and any other factors - so that the effect of each cause may be understood


The exact calculation is rather complex, for example if we want to know the effect of new trades, do we value them against yesterday's curve price or today's? If we use today's then in effect we have partially attributed some P&L change to the new curve price

In general the P&L of each trade, or a netted exposure across a portfolio is is recalculated individually for each change that might affect the p&l (forward curve, fx rates etc), keeping each other effect constant

Because each change is taken in isolation the the sum of all P&L attribution detail does not add up to the overall change in P&L...

P&L attribution is often called P&L explained or P&L explainer



by Nick Henfrey - Thursday, 5 April 2012, 2:35 PM

A party is an organization, or part of an organization, which is legally involved in a trade


Every trade has at least two parties: a buyer and a seller

Our organization, or part of organization, is referred to as the first party, the other organization, or part of an organization is the counterparty

There may be a broker who introduces the buyer and seller - the buyer and seller are not known to each other until the trade is executed 

If our organization executes a trade on an Exchange then the Exchange is the counterparty



by Nick Henfrey - Thursday, 5 April 2012, 2:33 PM

The attribute, or adjective, physical usually refers to trades and business process that results or involves in the physical delivery of energy or a commodity


A trade is physically settled when it will result in the delivery of an energy or commodity. This is in contrast to a trade that is financially or cash settled

Physical business process involves the activities around

Scheduling delivery of electricity and gas (Operations)

Logistics of moving and delivering other commodities by ship, barge, train, plane, truck etc. including loading and unloading and inspections



by Nick Henfrey - Wednesday, 5 December 2012, 6:07 PM

A group of trades


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



by Nick Henfrey - Thursday, 16 January 2014, 5:42 PM

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


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 


Position Reporting

by Nick Henfrey - Monday, 13 April 2015, 5:52 PM

Traders make, and lose, money by taking positions, either short or long at various points in the future

Open positions in the future imply a risk that needs to be managed very carefully as changes in the forward curves affect the value of the net open position

It is therefore critical that traders know their up to date position at all times

This is the purpose of Position Reporting by means of Position Reports




by Nick Henfrey - Tuesday, 3 April 2012, 4:36 PM

In Energy Trading terms Power is almost always synonymous with Electricity

In physics terms power is a measure of the rate of energy conversion per unit time


In SI terms energy is measured in Joules

One watt = one Joule per second

1 kilowatt (kW) = 1,000 joules per second

1 megawatt (MW) = 1,000 kW

1 gigawatt (GW) = 1,000 MW

1 terawatt (TW) = 1,000 TW

Since power is energy per unit time (energy divided by time) it follows that energy is power multiplied by time

Frequently energy is measured in these terms:

1 kWh = 1 kilowatt for an hour = 3,600 * 1,000 joules = 3,600,000 joules



by Nick Henfrey - Wednesday, 10 September 2014, 7:26 AM

In Energy trading a Product is a standardized type of trade which may be offered by an Exchange, quoted by a Broker, or be the subject of a published Index


Note the similarity to an Instrument

A typical product has dimensional attributes of:



by Nick Henfrey - Tuesday, 28 October 2014, 5:45 PM

A term generally used in gas and power trading for trades that deliver in the near future


The exact definition is not fixed

Some trading platforms define prompt as completing delivery within a week of the trade date, others within the same month as the trade date