Futures Glossary
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F G H
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L M N
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X Y Z
| Accrued Interest:
Interest earned between the most recent interest payment and the
present date but not yet paid to the lender. |
| Add-on Method: A method
of paying interest where the interest is added onto the principal
at maturity or interest payment dates. |
| Adjusted Futures Price:
The cash-price equivalent reflected in the current futures price.
This is calculated by taking the futures price times the
conversion factor for the particular financial instrument (e.g.,
bond or note) being delivered. |
| Arbitrage: The
simultaneous purchase and sale of similar commodities in different
markets to take advantage of a price discrepancy. |
| Arbitration: The
procedure of settling disputes between members, or between members
and customers. |
| Assign: To make an
option seller perform his obligation to assume a short futures
position (as a seller of a call option) or a long futures position
(as a seller of a put option). |
| Associated Person (AP):
An individual who solicits orders, customers, or customer funds
(or who supervises persons performing such duties) on behalf of a
Futures Commission Merchant, an Introducing Broker, a Commodity
Trading Adviser, or a Commodity Pool Operator. |
| Associate Membership (CBOT):
A Chicago Board of Trade membership that allows an individual to
trade financial instrument futures and other designated markets. |
| At-the-Money Option: An
option with a strike price that is equal, or approximately equal,
to the current market price of the underlying futures contract. |
| Balance of Payment: A
summary of the international transactions of a country over a
period of time including commodity and service transactions,
capital transactions, and gold movements. |
| Bar Chart: A chart that
graphs the high, low, and settlement prices for a specific trading
session over a given period of time. |
| Basis: The difference
between the current cash price and the futures price of the same
commodity. Unless otherwise specified, the price of the nearby
futures contract month is generally used to calculate the basis. |
| Bear: Someone who
thinks market prices will decline. |
| Bear Market: A period
of declining market prices. |
| Bear Spread: In most
commodities and financial instruments, the term refers to selling
the nearby contract month, and buying the deferred contract, to
profit from a change in the price relationship. |
| Bid: An expression
indicating a desire to buy a commodity at a given price; opposite
of offer. |
| Board of Trade Clearing
Corporation: An independent corporation that settles all
trades made at the Chicago Board of Trade acting as a guarantor
for all trades cleared by it, reconciles all clearing member firm
accounts each day to ensure that all gains have been credited and
all losses have been collected, and sets and adjusts clearing
member firm margins for changing market conditions. Also referred
to as clearing corporation. See Clearinghouse. |
| Book Entry Securities:
Electronically recorded securities that include each creditor's
name, address, Social Security or tax identification number, and
dollar amount loaned, (i.e., no certificates are issued to bond
holders, instead, the transfer agent electronically credits
interest payments to each creditor's bank account on a designated
date). |
| Broker: A company or
individual that executes futures and options orders on behalf of
financial and commercial institutions and/or the general public. |
| Bull: Someone who
thinks market prices will rise. |
| Bull Market: A period
of rising market prices. |
| Bull Spread: In most
commodities and financial instruments, the term refers to buying
the nearby month, and selling the deferred month, to profit from
the change in the price relationship. |
| Butterfly Spread: The
placing of two interdelivery spreads in opposite directions with
the center delivery month common to both spreads. |
| Calendar Spread: See
Interdelivery Spread and Horizontal Spread. |
| Call Option: An option
that gives the buyer the right, but not the obligation, to
purchase (go "long'') the underlying futures contract at the
strike price on or before the expiration date. |
| Canceling Order: An
order that deletes a customer's previous order. |
| Carrying Charge: For
physical commodities such as grains and metals, the cost of
storage space, insurance, and finance charges incurred by holding
a physical commodity. In interest rate futures markets, it refers
to the differential between the yield on a cash instrument and the
cost of funds necessary to buy the instrument. Also referred to as
cost of carry or carry. |
| Carryover: Grain and
oilseed commodities not consumed during the marketing year and
remaining in storage at year's end. These stocks are "carried
over'' into the next marketing year and added to the stocks
produced during that crop year. |
| Cash Commodity: An
actual physical commodity someone is buying or selling, e.g.,
soybeans, corn, gold, silver, Treasury bonds, etc. Also referred
to as actuals. |
| Cash Contract: A sales
agreement for either immediate or future delivery of the actual
product. |
| Cash Market: A place
where people buy and sell the actual commodities, i.e., grain
elevator, bank, etc. See Spot and Forward Contract. |
| Cash Settlement:
Transactions generally involving index-based futures contracts
that are settled in cash based on the actual value of the index on
the last trading day, in contrast to those that specify the
delivery of a commodity or financial instrument. |
| Certificate of Deposit (CD):
A time deposit with a specific maturity evidenced by a
certificate. |
| Charting: The use of
charts to analyze market behavior and anticipate future price
movements. Those who use charting as a trading method plot such
factors as high, low, and settlement prices; average price
movements; volume; and open interest. Two basic price charts are
bar charts and point-and-figure charts. See Technical
Analysis. |
| Cheap: Colloquialism
implying that a commodity is underpriced. |
| Cheapest to Deliver: A
method to determine which particular cash debt instrument is most
profitable to deliver against a futures contract. |
| Clear: The process by
which a clearinghouse maintains records of all trades and settles
margin flow on a daily mark-to-market basis for its clearing
member. |
| Clearinghouse: An
agency or separate corporation of a futures exchange that is
responsible for settling trading accounts, clearing trades,
collecting and maintaining margin monies, regulating delivery, and
reporting trading data. Clearinghouses act as third parties to all
futures and options contracts acting as a buyer to every clearing
member seller and a seller to every clearing member buyer. |
| Clearing Margin:
Financial safeguards to ensure that clearing members (usually
companies or corporations) perform on their customers' open
futures and options contracts. Clearing margins are distinct from
customer margins that individual buyers and sellers of futures and
options contracts are required to deposit with brokers. See Customer
Margin. |
| Clearing Member: A
member of an exchange clearinghouse. Memberships in clearing
organizations are usually held by companies. Clearing members are
responsible for the financial commitments of customers that clear
through their firm. |
| Closing Range: A range
of prices at which buy and sell transactions took place during the
market close. |
| COM Membership (CBOT):
A Chicago Board of Trade membership that allows an individual to
trade contracts listed in the commodity options market category. |
| Commission Fee: A fee
charged by a broker for executing a transaction. Also referred to
as brokerage fee. |
| Commission House: See
Futures Commission Merchant (FCM). |
| Commodity: An article
of commerce or a product that can be used for commerce. In a
narrow sense, products traded on an authorized commodity exchange.
The types of commodities include agricultural products, metals,
petroleum, foreign currencies, and financial instruments and
indexes, to name a few. |
| Commodity Credit
Corporation (CCC): A branch of the U.S. Department of
Agriculture, established in 1933, that supervises the government's
farm loan and subsidy programs. |
| Commodity Futures Trading
Commission (CFTC): A federal regulatory agency established
under the Commodity Futures Trading Commission Act, as amended in
1974, that oversees futures trading in the United States. The
commission is comprised of five commissioners, one of whom is
designated as chairman, all appointed by the President subject to
Senate confirmation, and is independent of all cabinet
departments. |
| Commodity Pool: An
enterprise in which funds contributed by a number of persons are
combined for the purpose of trading futures contracts or commodity
options. |
| Commodity Pool Operator (CPO):
An individual or organization that operates or solicits funds for
a commodity pool. |
| Commodity Trading Adviser (CTA):
A person who, for compensation or profit, directly or indirectly
advises others as to the value or the advisability of buying or
selling futures contracts or commodity options. Advising
indirectly includes exercising trading authority over a customer's
account as well as providing recommendations through written
publications or other media. |
| Computerized Trading
Reconstruction (CTR) System: A Chicago Board of Trade
computerized surveillance program that pinpoints in any trade the
traders, the contract, the quantity, the price, and time of
execution to the nearest minute. |
| Consumer Price Index (CPI):
A major inflation measure computed by the U.S. Department of
Commerce. It measures the change in prices of a fixed market
basket of some 385 goods and services in the previous month. |
| Convergence: A term
referring to cash and futures prices tending to come together
(i.e., the basis approaches zero) as the futures contract nears
expiration. |
| Conversion Factor: A
factor used to equate the price of T-bond and T-note futures
contracts with the various cash T-bonds and T-notes eligible for
delivery. This factor is based on the relationship of the
cash-instrument coupon to the required 8 percent deliverable grade
of a futures contract as well as taking into account the cash
instrument's maturity or call. |
| Coupon: The interest
rate on a debt instrument expressed in terms of a percent on an
annualized basis that the issuer guarantees to pay the holder
until maturity. |
| Crop (Marketing) Year:
The time span from harvest to harvest for agricultural
commodities. The crop marketing year varies slightly with each ag
commodity, but it tends to begin at harvest and end before the
next year's harvest, e.g., the marketing year for soybeans begins
September 1 and ends August 31. The futures contract month of
November represents the first major new-crop marketing month, and
the contract month of July represents the last major old-crop
marketing month for soybeans. |
| Crop Reports: Reports
compiled by the U.S. Department of Agriculture on various ag
commodities that are released throughout the year. Information in
the reports includes estimates on planted acreage, yield, and
expected production, as well as comparison of production from
previous years. |
| Cross-Hedging: Hedging
a cash commodity using a different but related futures contract
when there is no futures contract for the cash commodity being
hedged and the cash and futures markets follow similar price
trends (e.g., using soybean meal futures to hedge fish meal). |
| Crush Spread: The
purchase of soybean futures and the simultaneous sale of soybean
oil and meal futures. See Reverse Crush. |
| Current Yield: The
ratio of the coupon to the current market price of the debt
instrument |
| Customer Margin: Within
the futures industry, financial guarantees required of both buyers
and sellers of futures contracts and sellers of options contracts
to ensure fulfillment of contract obligations. FCMs are
responsible for overseeing customer margin accounts. Margins are
determined on the basis of market risk and contract value. Also
referred to as performance-bond margin. See Clearing
Margin. |
| Daily Trading Limit:
The maximum price range set by the exchange each day for a
contract. Day Traders: Speculators who take positions in futures
or options contracts and liquidate them prior to the close of the
same trading day. |
| Deferred (Delivery) Month:
The more distant month(s) in which futures trading is taking
place, as distinguished from the nearby (delivery) month. |
| Deliverable Grades: The
standard grades of commodities or instruments listed in the rules
of the exchanges that must be met when delivering cash commodities
against futures contracts. Grades are often accompanied by a
schedule of discounts and premiums allowable for delivery of
commodities of lesser or greater quality than the standard called
for by the exchange. Also referred to as contract grades. |
| Delivery: The transfer
of the cash commodity from the seller of a futures contract to the
buyer of a futures contract. Each futures exchange has specific
procedures for delivery of a cash commodity. Some futures
contracts, such as stock index contracts, are cash settled. |
| Delivery Day: The third
day in the delivery process at the Chicago Board of Trade, when
the buyer's clearing firm presents the delivery notice with a
certified check for the amount due at the office of the seller's
clearing firm. |
| Delivery Month: A
specific month in which delivery may take place under the terms of
a futures contract. Also referred to as contract month. |
| Delivery Points: The
locations and facilities designated by a futures exchange where
stocks of a commodity may be delivered in fulfillment of a futures
contract, under procedures established by the exchange. |
| Delta: A measure of how
much an option premium changes, given a unit change in the
underlying futures price. Delta often is interpreted as the
probability that the option will be in-the-money by expiration. |
| Demand, Law of: The
relationship between product demand and price. |
| Differentials: Price
differences between classes, grades, and delivery locations of
various stocks of the same commodity. |
| Discount Method: A
method of paying interest by issuing a security at less than par
and repaying par value at maturity. The difference between the
higher par value and the lower purchase price is the interest. |
| Discount Rate: The
interest rate charged on loans by the Federal Reserve to member
banks. Discretionary Account: An arrangement by which the holder
of the account gives written power of attorney to another person,
often his broker, to make trading decisions. Also known as a
controlled or managed account. |
| Discretionary Account:
An arrangement by which the holder of the account gives written
power of attorney to person, often his broker, to make trading
decisions. Also known as a controlled or managed account. |
| Econometrics: The
application of statistical and mathematical methods in the field
of economics to test and quantify economic theories and the
solutions to economic problems. |
| Equilibrium Price: The
market price at which the quantity supplied of a commodity equals
the quantity demanded. |
| Eurodollars: U.S.
dollars on deposit with a bank outside of the United States and,
consequently, outside the jurisdiction of the United States. The
bank could be either a foreign bank or a subsidiary of a U.S.
bank. |
| European Terms: A
method of quoting exchange rates, which measures the amount of
foreign currency needed to buy one U.S. dollar, i.e., foreign
currency unit per dollar. See Reciprocal
of European Terms. |
| Exchange For Physicals (EFP):
A transaction generally used by two hedgers who want to exchange
futures for cash positions. Also referred to as against actuals or
versus cash. |
| Exercise: The action
taken by the holder of a call option if he wishes to purchase the
underlying futures contract or by the holder of a put option if he
wishes to sell the underlying futures contract. |
| Expanded Trading Hours:
Additional trading hours of specific futures and options contracts
at the Chicago Board of Trade that overlap with business hours in
other time zones. |
| Expiration Date:
Options on futures generally expire on a specific date during the
month preceding the futures contract delivery month. For example,
an option on a March futures contract expires in February but is
referred to as a March option because its exercise would result in
a March futures contract position. |
| Face Value: The amount
of money printed on the face of the certificate of a security; the
original dollar amount of indebtedness incurred. |
| Federal Funds: Member
bank deposits at the Federal Reserve; these funds are loaned by
member banks to other member banks. |
| Federal Funds Rate: The
rate of interest charged for the use of federal funds. |
| Federal Housing
Administration (FHA): A division of the U.S. Department of
Housing and Urban Development that insures residential mortgage
loans and sets construction standards. |
| Federal Reserve System:
A central banking system in the United States, created by the
Federal Reserve Act in 1913, designed to assist the nation in
attaining its economic and financial goals. The structure of the
Federal Reserve System includes a Board of Governors, the Federal
Open Market Committee, and 12 Federal Reserve Banks. |
| Feed Ratio: A ratio
used to express the relationship of feeding costs to the dollar
value of livestock. See Hog/Corn Ratio and Steer/Corn Ratio. |
| Fill-or-Kill: A
customer order that is a price limit order that must be filled
immediately or canceled. |
| Financial Analysis Auditing
Compliance Tracking System (FACTS): The National Futures
Association's computerized system of maintaining financial records
of its member firms and monitoring their financial conditions. |
| Financial Instrument:
There are two basic types: (1) a debt instrument, which is a loan
with an agreement to pay back funds with interest; (2) an equity
security, which is a share or stock in a company. |
| First Notice Day:
According to Chicago Board of Trade rules, the first day on which
a notice of intent to deliver a commodity in fulfillment of a
given month's futures contract can be made by the clearinghouse to
a buyer. The clearinghouse also informs the sellers who they have
been matched up with. |
| Floor Broker (FB): An
individual who executes orders for the purchase or sale of any
commodity futures or options contract on any contract market for
any other person. |
| Floor Trader (FT): An
individual who executes trades for the purchase or sale of any
commodity futures or options contract on any contract market for
such individual's own account. |
| Forex Market: An
over-the-counter market where buyers and sellers conduct foreign
exchange business by telephone and other means of communication.
Also referred to as foreign exchange market. |
| Forward (Cash) Contract:
A cash contract in which a seller agrees to deliver a specific
cash commodity to a buyer sometime in the future. Forward
contracts, in contrast to futures contracts, are privately
negotiated and are not standardized. |
| Full Carrying Charge Market:
A futures market where the price difference between delivery
months reflects the total costs of interest, insurance, and
storage. |
| Full Membership (CBOT):
A Chicago Board of Trade membership that allows an individual to
trade all futures and options contracts listed by the exchange. |
| Fundamental Analysis: A
method of anticipating future price movement using supply and
demand information. |
| Futures Commission Merchant
(FCM): An individual or organization that solicits or accepts
orders to buy or sell futures contracts or options on futures and
accepts money or other assets from customers to support such
orders. Also referred to as commission house or wire house. |
| Futures Contract: A
legally binding agreement, made on the trading floor of a futures
exchange, to buy or sell a commodity or financial instrument
sometime in the future. Futures contracts are standardized
according to the quality, quantity, and delivery time and location
for each commodity. The only variable is price, which is
discovered on an exchange trading floor. |
| Futures Exchange: A
central marketplace with established rules and regulations where
buyers and sellers meet to trade futures and options on futures
contracts. |
| Gamma: A measurement of
how fast delta changes, given a unit change in the underlying
futures price. |
| GIM Membership (CBOT):
A Chicago Board of Trade membership that allows an individual to
trade all futures contracts listed in the government instrument
market category. |
| GLOBEX®: A global
after-hours electronic trading system. |
| Grain Terminal: Large
grain elevator facility with the capacity to ship grain by rail
and/or barge to domestic or foreign markets. |
| Gross Domestic Product
(GDP): The value of all final goods and services produced by
an economy over a particular time period, normally a year. |
| Gross National Product
(GNP): Gross Domestic Product plus the income accruing to
domestic residents as a result of investments abroad less income
earned in domestic markets accruing to foreigners abroad. |
| Gross Processing Margin (GPM):
The difference between the cost of soybeans and the combined sales
income of the processed soybean oil and meal. |
| Hedger: An individual
or company owning or planning to own a cash commodity corn,
soybeans, wheat, U.S. Treasury bonds, notes, bills, etc. and
concerned that the cost of the commodity may change before either
buying or selling it in the cash market. A hedger achieves
protection against changing cash prices by purchasing (selling)
futures contracts of the same or similar commodity and later
offsetting that position by selling (purchasing) futures contracts
of the same quantity and type as the initial transaction. |
| Hedging: The practice
of offsetting the price risk inherent in any cash market position
by taking an equal but opposite position in the futures market.
Hedgers use the futures markets to protect their businesses from
adverse price changes. See Selling (Short) Hedge and Purchasing
(Long) Hedge. |
| High: The highest price
of the day for a particular futures contract. |
| Hog/Corn Ratio: The
relationship of feeding costs to the dollar value of hogs. It is
measured by dividing the price of hogs ($/hundredweight) by the
price of corn ($/bushel). When corn prices are high relative to
pork prices, fewer units of corn equal the dollar value of 100
pounds of pork. Conversely, when corn prices are low in relation
to pork prices, more units of corn are required to equal the value
of 100 pounds of pork. See Feed Ratio. |
| Horizontal Spread: The
purchase of either a call or put option and the simultaneous sale
of the same type of option with typically the same strike price
but with a different expiration month. Also referred to as a
calendar spread. |
| IDEM Membership (CBOT):
A Chicago Board of Trade membership of trading privileges for
futures contracts in the index, debt, and energy markets category
(gold, municipal bond index, 30-day fed funds, and stock index
futures). |
| Intercommodity Spread:
The purchase of a given delivery month of one futures market and
the simultaneous sale of the same delivery month of a different,
but related, futures market. |
| Interdelivery Spread:
The purchase of one delivery month of a given futures contract and
simultaneous sale of another delivery month of the same commodity
on the same exchange. Also referred to as an intramarket or
calendar spread. |
| Intermarket Spread: The
sale of a given delivery month of a futures contract on one
exchange and the simultaneous purchase of the same delivery month
and futures contract on another exchange. |
| In-the-Money Option: An
option having intrinsic value. A call option is in-the-money if
its strike price is below the current price of the underlying
futures contract. A put option is in-the-money if its strike price
is above the current price of the underlying futures contract. See
Intrinsic Value. |
| Introducing Broker (IB):
A person or organization that solicits or accepts orders to buy or
sell futures contracts or commodity options but does not accept
money or other assets from customers to support such orders. |
| Inverted Market: A
futures market in which the relationship between two delivery
months of the same commodity is abnormal. |
| Invisible Supply:
Uncounted stocks of a commodity in the hands of wholesalers,
manufacturers, and producers that cannot be identified accurately;
stocks outside commercial channels but theoretically available to
the market. |
| Lagging Indicators:
Market indicators showing the general direction of the economy and
confirming or denying the trend implied by the leading indicators.
Also referred to as concurrent indicators. |
| Last Trading Day:
According to the Chicago Board of Trade rules, the final day when
trading may occur in a given futures or options contract month.
Futures contracts outstanding at the end of the last trading day
must be settled by delivery of the underlying commodity or
securities or by agreement for monetary settlement (in some cases
by EFPs). |
| Leading Indicators:
Market indicators that signal the state of the economy for the
coming months. Some of the leading indicators include: average
manufacturing workweek, initial claims for unemployment insurance,
orders for consumer goods and material, percentage of companies
reporting slower deliveries, change in manufacturers' unfilled
orders for durable goods, plant and equipment orders, new building
permits, index of consumer expectations, change in material
prices, prices of stocks, change in money supply. |
| Leverage: The ability
to control large dollar amounts of a commodity with a
comparatively small amount of capital. |
| Limit Order: An order
in which the customer sets a limit on the price and/or time of
execution. |
| Limits: See Position
Limit, Price Limit, Variable Limit. |
| Linkage: The ability to
buy (sell) contracts on one exchange (such as the Chicago
Mercantile Exchange) and later sell (buy) them on another exchange
(such as the Singapore International Monetary Exchange). |
| Liquid: A
characteristic of a security or commodity market with enough units
outstanding to allow large transactions without a substantial
change in price. Institutional investors are inclined to seek out
liquid investments so that their trading activity will not
influence the market price. |
| Liquidate: Selling (or
purchasing) futures contracts of the same delivery month purchased
(or sold) during an earlier transaction or making (or taking)
delivery of the cash commodity represented by the futures
contract. See Offset. |
| Liquidity Data Bank®(LDB®):
A computerized profile of CBOT market activity, used by technical
traders to analyze price trends and develop trading strategies.
There is a specialized display of daily volume data and time
distribution of prices for every commodity traded on the Chicago
Board of Trade. |
| Loan Program: A federal
program in which the government lends money at preannounced rates
to farmers and allows them to use the crops they plant for the
upcoming crop year as collateral. Default on these loans is the
primary method by which the government acquires stocks of
agricultural commodities. |
| Loan Rate: The amount
lent per unit of a commodity to farmers. |
| Long: One who has
bought futures contracts or owns a cash commodity. Long Hedge: See
Purchasing Hedge. |
| Low: The lowest price
of the day for a particular futures contract. |
| Maintenance Margin: A
set minimum margin (per outstanding futures contract) that a
customer must maintain in his margin account. |
| Managed Futures:
Represents an industry comprised of professional money managers
known as commodity trading advisors who manage client assets on a
discretionary basis, using global futures markets as an investment
medium. |
| Margin: See Clearing
Margin and Customer Margin. |
| Margin Call: A call
from a clearinghouse to a clearing member, or from a brokerage
firm to a customer, to bring margin deposits up to a required
minimum level. |
| Market Information Data
Inquiry System (MIDIS): Historical Chicago Board of Trade
price, volume, open interest data and other market information
accessible by computers within the Chicago Board of Trade
building. |
| Market Order: An order
to buy or sell a futures contract of a given delivery month to be
filled at the best possible price and as soon as possible. |
| Market Price Reporting and
Information System (MPRIS): The Chicago Board of Trade's
computerized price-reporting system. |
| Market Profile®: A
Chicago Board of Trade information service that helps technical
traders analyze price trends. Market Profile consists of the Time
and Sales ticker and the Liquidity Data Bank. |
| Market Reporter: A
person employed by the exchange and located in or near the trading
pit who records prices as they occur during trading. |
| Marking-to-Market: To
debit or credit on a daily basis a margin account based on the
close of that day's trading session. In this way, buyers and
sellers are protected against the possibility of contract default. |
| Minimum Price Fluctuation:
See Tick. |
| Money Supply: The
amount of money in the economy, consisting primarily of currency
in circulation plus deposits in banks: M-1–U.S. money supply
consisting of currency held by the public, traveler's checks,
checking account funds, NOW and super-NOW accounts, automatic
transfer service accounts, and balances in credit unions.
M-2–U.S. money supply consisting of M-1 plus savings and small
time deposits (less than $100,000) at depository institutions,
overnight repurchase agreements at commercial banks, and money
market mutual fund accounts. M-3 –U.S. money supply consisting
of M-2 plus large time deposits ($100,000 or more) at depository
institutions, repurchase agreements with maturities longer than
one day at commercial banks, and institutional money market
accounts. |
| Moving-Average Charts:
A statistical price analysis method of recognizing different price
trends. A moving average is calculated by adding the prices for a
predetermined number of days and then dividing by the number of
days. |
| Municipal Bonds: Debt
securities issued by state and local governments, and special
districts and counties. |
| National Futures
Association (NFA): An industrywide, industry-supported,
self-regulatory organization for futures and options markets. The
primary responsibilities of the NFA are to enforce ethical
standards and customer protection rules, screen futures
professionals for membership, audit and monitor professionals for
financial and general compliance rules, and provide for
arbitration of futures-related disputes. |
| Nearby (Delivery) Month:
The futures contract month closest to expiration. Also referred to
as spot month. |
| Notice Day: According
to Chicago Board of Trade rules, the second day of the three-day
delivery process when the clearing corporation matches the buyer
with the oldest reported long position to the delivering seller
and notifies both parties. See First
Notice Day. |
| Offer: An expression
indicating one's desire to sell a commodity at a given price;
opposite of bid. |
| Offset: Taking a second
futures or options position opposite to the initial or opening
position. See Liquidate. |
| OPEC: Organization of
Petroleum Exporting Countries, emerged as the major petroleum
pricing power in1973, when the ownership of oil production in the
Middle East transferred from the operating companies to the
governments of the producing countries or to their national oil.
Members are: Algeria, Ecuador, Gabon, Indonesia, Iran, Iraq,
Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab
Emirates, and Venezuela. |
| Opening Range: A range
of prices at which buy and sell transactions took place during the
opening of the market. |
| Open Interest: The
total number of futures or options contracts of a given commodity
that have not yet been offset by an opposite futures or option
transaction nor fulfilled by delivery of the commodity or option
exercise. Each open transaction has a buyer and a seller, but for
calculation of open interest, only one side of the contract is
counted. |
| Open Market Operation:
The buying and selling of government securities Treasury bills,
notes, and bonds by the Federal Reserve. |
| Open Outcry: Method of
public auction for making verbal bids and offers in the trading
pits or rings of futures exchanges. |
| Option: A contract that
conveys the right, but not the obligation, to buy or sell a
particular item at a certain price for a limited time. Only the
seller of the option is obligated to perform. |
| Option Buyer: The
purchaser of either a call or put option. Option buyers receive
the right, but not the obligation, to assume a futures position.
Also referred to as the holder. |
| Option Premium: The
price of an option the sum of money that the option buyer pays and
the option seller receives for the rights granted by the option. |
| Option Seller: The
person who sells an option in return for a premium and is
obligated to perform when the holder exercises his right under the
option contract. Also referred to as the writer. |
| Option Spread: The
simultaneous purchase and sale of one or more options contracts,
futures, and/or cash positions. |
| Original Margin: The
amount a futures market participant must deposit into his margin
account at the time he places an order to buy or sell a futures
contract. Also referred to as initial margin. |
| Out-of-the-Money Option:
An option with no intrinsic value, i.e., a call whose strike price
is above the current futures price or a put whose strike price is
below the current futures price. |
| Over-the-Counter (OTC)
Market: A market where products such as stocks, foreign
currencies, and other cash items are bought and sold by telephone
and other means of communication. |
| P&S (Purchase and Sale)
Statement: A statement sent by a commission house to a
customer when his futures or options on futures position has
changed, showing the number of contracts bought or sold, the
prices at which the contracts were bought or sold, the gross
profit or loss, the commission charges, and the net profit or loss
on the transactions. |
| Par: The face value of
a security. For example, a bond selling at par is worth the same
dollar amount it was issued for or at which it will be redeemed at
maturity. |
| Payment-In-Kind (PIK)
Program: A government program in which farmers who comply with
a voluntary acreage-control program and set aside an additional
percentage of acreage specified by the government receive
certificates that can be redeemed for government-owned stocks of
grain. |
| Performance Bond Margin:
The amount of money deposited by both a buyer and seller of a
futures contract or an options seller to ensure performance of the
term of the contract. Margin in commodities is not a payment of
equity or down payment on the commodity itself, but rather it is a
security deposit. See Customer Margin and Clearing Margin. |
| Pit: The area on the
trading floor where futures and options on futures contracts are
bought and sold. Pits are usually raised octagonal platforms with
steps descending on the inside that permit buyers and sellers of
contracts to see each other. |
| Point-and-Figure Charts:
Charts that show price changes of a minimum amount regardless of
the time period involved. |
| Position: A market
commitment. A buyer of a futures contract is said to have a long
position and, conversely, a seller of futures contracts is said to
have a short position. |
| Position Day: According
to the Chicago Board of Trade rules, the first day in the process
of making or taking delivery of the actual commodity on a futures
contract. The clearing firm representing the seller notifies the
Board of Trade Clearing Corporation that its short customers want
to deliver on a futures contract. |
| Position Limit: The
maximum number of speculative futures contracts one can hold as
determined by the Commodity Futures Trading Commission and/or the
exchange upon which the contract is traded. Also referred to as
trading limit. |
| Position Trader: An
approach to trading in which the trader either buys or sells
contracts and holds them for an extended period of time. |
| Premium: (1) The
additional payment allowed by exchange regulation for delivery of
higher-than-required standards or grades of a commodity against a
futures contract. (2) In speaking of price relationships between
different delivery months of a given commodity, one is said to be
""trading at a premium'' over another when its price is
greater than that of the other. (3) In financial instruments, the
dollar amount by which a security trades above its principal
value. See Option Premium. |
| Price Discovery: The
generation of information about ""future'' cash market
prices through the futures markets. |
| Price Limit: The
maximum advance or decline from the previous day's settlement
price permitted for a contract in one trading session by the rules
of the exchange. See also Variable Limit. |
| Price Limit Order: A
customer order that specifies the price at which a trade can be
executed. |
| Primary Dealer: A
designation given by the Federal Reserve System to commercial
banks or broker/dealers who meet specific criteria. Among the
criteria are capital requirements and meaningful participation in
the Treasury auctions. |
| Primary Market: Market
of new issues of securities. |
| Prime Rate: Interest
rate charged by major banks to their most creditworthy customers. |
| Producer Price Index (PPI):
An index that shows the cost of resources needed to produce
manufactured goods during the previous month. |
| Pulpit: A raised
structure adjacent to, or in the center of, the pit or ring at a
futures exchange where market reporters, employed by the exchange,
record price changes as they occur in the trading pit. |
| Purchasing Hedge (or Long
Hedge): Buying futures contracts to protect against a possible
price increase of cash commodities that will be purchased in the
future. At the time the cash commodities are bought, the open
futures position is closed by selling an equal number and type of
futures contracts as those that were initially purchased. Also
referred to as a buying hedge. See Hedging. |
| Put Option: An option
that gives the option buyer the right but not the obligation to
sell (go "short'') the underlying futures contract at the
strike price on or before the expiration date. |
| Range (Price): The
price span during a given trading session, week, month, year, etc. |
| Reciprocal of European
Terms: One method of quoting exchange rates, which measures
the U.S. dollar value of one foreign currency unit, i.e., U.S.
dollars per foreign units. See European
Terms. |
| Repurchase Agreements ( or
Repo): An agreement between a seller and a buyer, usually in
U.S. government securities, in which the seller agrees to buy back
the security at a later date. |
| Reserve Requirements:
The minimum amount of cash and liquid assets as a percentage of
demand deposits and time deposits that member banks of the Federal
Reserve are required to maintain. |
| Resistance: A level
above which prices have had difficulty penetrating. |
| Resumption: The
reopening the following day of specific futures and options
markets that also trade during the evening session at the Chicago
Board of Trade. |
| Reverse Crush Spread:
The sale of soybean futures and the simultaneous purchase of
soybean oil and meal futures. See Crush
Spread. |
| Runners: Messengers who
rush orders received by phone clerks to brokers for execution in
the pit. |
| Scalper: A trader who
trades for small, short-term profits during the course of a
trading session, rarely carrying a position overnight. |
| Secondary Market:
Market where previously issued securities are bought and sold. |
| Security: Common or
preferred stock; a bond of a corporation, government, or
quasi-government body. |
| Selling Hedge (or Short
Hedge): Selling futures contracts to protect against possible
declining prices of commodities that will be sold in the future.
At the time the cash commodities are sold, the open futures
position is closed by purchasing an equal number and type of
futures contracts as those that were initially sold. See Hedging. |
| Settlement Price: The
last price paid for a commodity on any trading day. The exchange
clearinghouse determines a firm's net gains or losses, margin
requirements, and the next day's price limits, based on each
futures and options contract settlement price. If there is a
closing range of prices, the settlement price is determined by
averaging those prices. Also referred to as settle or closing
price. |
| Short: (noun) One who
has sold futures contracts or plans to purchase a cash commodity.
(verb) Selling futures contracts or initiating a cash forward
contract sale without offsetting a particular market position. |
| Simulation Analysis of
Financial Exposure (SAFE): A sophisticated computer
risk-analysis program that monitors the risk of clearing members
and large-volume traders at the Chicago Board of Trade. It
calculates the risk of change in market prices or volatility to a
firm carrying open positions. |
| Speculator: A market
participant who tries to profit from buying and selling futures
and options contracts by anticipating future price movements.
Speculators assume market price risk and add liquidity and capital
to the futures markets. |
| Spot: Usually refers to
a cash market price for a physical commodity that is available for
immediate delivery. |
| Spot Month: See Nearby
(Delivery) Month. |
| Spread: The price
difference between two related markets or commodities. |
| Spreading: The
simultaneous buying and selling of two related markets in the
expectation that a profit will be made when the position is
offset. Examples include: buying one futures contract and selling
another futures contract of the same commodity but different
delivery month; buying and selling the same delivery month of the
same commodity on different futures exchanges; buying a given
delivery month of one futures market and selling the same delivery
month of a different, but related, futures market. |
| Steer/Corn Ratio: The
relationship of cattle prices to feeding costs. It is measured by
dividing the price of cattle ($/hundredweight) by the price of
corn ($/bushel). When corn prices are high relative to cattle
prices, fewer units of corn equal the dollar value of 100 pounds
of cattle. Conversely, when corn prices are low in relation to
cattle prices, more units of corn are required to equal the value
of 100 pounds of beef. See Feed Ratio. |
| Stock Index: An
indicator used to measure and report value changes in a selected
group of stocks. How a particular stock index tracks the market
depends on its composition the sampling of stocks, the weighting
of individual stocks, and the method of averaging used to
establish an index. |
| Stock Market: A market
in which shares of stock are bought and sold. |
| Stop-Limit Order: A
variation of a stop order in which a trade must be executed at the
exact price or better. If the order cannot be executed, it is held
until the stated price or better is reached again. |
| Stop Order: An order to
buy or sell when the market reaches a specified point. A stop
order to buy becomes a market order when the futures contract
trades (or is bid) at or above the stop price. A stop order to
sell becomes a market order when the futures contract trades (or
is offered) at or below the stop price. |
| Strike Price: The price
at which the futures contract underlying a call or put option can
be purchased (if a call) or sold (if a put). Also referred to as
exercise price. |
| Supply, Law of: The
relationship between product supply and its price. |
| Support: The place on a
chart where the buying of futures contracts is sufficient to halt
a price decline. |
| Suspension: The end of
the evening session for specific futures and options markets
traded at the Chicago Board of Trade. |
| Technical Analysis:
Anticipating future price movement using historical prices,
trading volume, open interest, and other trading data to study
price patterns. |
| Tick: The smallest
allowable increment of price movement for a contract. Also
referred to as minimum price fluctuation. |
| Time Limit Order: A
customer order that designates the time during which it can be
executed. |
| Time and Sales Ticker:
Part of the Chicago Board of Trade Market Profile system
consisting of an on-line graphic service that transmits price and
time information throughout the day. |
| Time-Stamped: Part of
the order-routing process in which the time of day is stamped on
an order. An order is time-stamped when it is (1) received on the
trading floor, and (2) completed. |
| Time Value: The amount
of money option buyers are willing to pay for an option in the
anticipation that, over time, a change in the underlying futures
price will cause the option to increase in value. In general, an
option premium is the sum of time value and intrinsic value. Any
amount by which an option premium exceeds the option's intrinsic
value can be considered time value. Also referred to as extrinsic
value. |
| Trade Balance: The
difference between a nation's imports and exports of merchandise.
Trading Limit: See Position Limit. |
| Underlying Futures Contract:
The specific futures contract that is bought or sold by exercising
an option. |
| U.S. Treasury Bill: A
short-term U.S. government debt instrument with an original
maturity of one year or less. Bills are sold at a discount from
par with the interest earned being the difference between the face
value received at maturity and the price paid. |
| U.S. Treasury Bond:
Government-debt security with a coupon and original maturity of
more than 10 years. Interest is paid semiannually. |
| U.S. Treasury Note:
Government-debt security with a coupon and original maturity of
one to 10 years. |
| Variable Limit:
According to the Chicago Board of Trade rules, an expanded
allowable price range set during volatile markets. |
| Variation Margin:
During periods of great market volatility or in the case of
high-risk accounts, additional margin deposited by a clearing
member firm to an exchange clearinghouse. |
| Vertical Spread: Buying
and selling puts or calls of the same expiration month but
different strike prices. |
| Volatility: A
measurement of the change in price over a given time period. It is
often expressed as a percentage and computed as the annualized
standard deviation of percentage change in daily price. |
| Volume: The number of
purchases or sales of a commodity futures contract made during a
specified period of time, often the total transactions for one
trading day. |
| Warehouse Receipt:
Document guaranteeing the existence and availability of a given
quantity and quality of a commodity in storage; commonly used as
the instrument of transfer of ownership in both cash and futures
transactions. |
| Wire House: See Futures
Commission Merchant (FCM). |
| Yield: A measure of the
annual return on an investment. |
| Yield Curve: A chart in
which the yield level is plotted on the vertical axis and the term
to maturity of debt instruments of similar creditwor thiness is
plotted on the horizontal axis. The yield curve is positive when
long-term rates are higher than short-term rates. However, when
short-term rates are higher than yields on long-term investments,
the yield curve is negative or inverted. |
| Yield to Maturity: The
rate of return an investor receives if a fixed-income security is
held to maturity. |
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