This glossary was extracted from the
Chicago Board of Trade's Commodity Trading Manual, which is produced by
the Market Development Department of the exchange.
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.
The simultaneous purchase and sale of similar
commodities in different markets to take advantage of 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:
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.
B
Balance of Payment:
A summary of the international transactions
of a country over a period of time including commodity and service 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.
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.
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.
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.
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 index,
to name a few.
Commodity Credit Corp.:
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:
An individual or organization that operates
or solicits funds for a commodity pool.
Commodity Trading Adviser:
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 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.
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.
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.
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 fulfilling 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.
D
Daily Trading Limit:
The maximum price range set by the exchange
cash 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 Bank.
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.
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:
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.
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.
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 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.
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.
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:
The value of all final goods and services
produced by an economy over a particular time period, normally a year.
Gross National Product:
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:
The difference between the cost of soybeans
and the combined sales income of the processed soybean oil and meal.
H
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
business 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.
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.
I
IDEM Membership (CBOT):
A Chicago Board of Trade membership of trading
privileges for futures contract in the index, debt, and energy markets
category (gold, municipal bond index, 30-day fed funds, and stock index
futures).
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.
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 e identified accurately;
stocks outside commercial channels but theoretically available to the market.
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 option 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.
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®
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 stock 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.
Represents an industry comprised of professional
money mangers known as commodity trading advisors who manage client assets
on a discretionary basis, using global futures markets as an investment
medium.
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
Systems:
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 an sellers are protected against the possibility of contract default.
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 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.
N
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 riles,
screen futures professional 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.
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.
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 in 1973, 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
companies. 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 an 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.
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 Market:
A market where products such as stocks, foreign
currencies, and other cash items are bought and sold by telephone and other
means of communications.
P
Purchase and Sell Statement:
A Statement sent by a commission house to
a customer when his futures or options on futures position ha 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 transaction.
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 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 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–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:
Buyer futures contracts to protect against
a possible price increase of cash commodities that will e 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.
R
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
measured 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.
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.
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.
A sophisticated computer risk-analysis program
that monitors the risk of clearing member 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.
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 weighing
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.
T
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.
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 buyer 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.
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.
V
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.
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 period. It is often expressed as a percentage and computed as the
annualized standard deviation of the percentage change in daily price.
Volume:
The number of purchases or sales of a commodity
futures contract made during a specific period of time, often the total
transactions for one trading day.
W
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.
A chart in which the yield level is plot on
the vertical axis and the term to maturity of debt instruments of similar
creditworthiness is plotted n the horizontal axis. The yield curve is positive
when long-term rates are higher than short-term rates However, 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.
If you wish to contact a broker directly about opening a trading
account or you'd like additional information on futures markets and trading
futures, please send e-mail to futures@compassfinancial.com
or phone 800-577-3600 (972-680-8080 in the Dallas area).
