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Glossary
of Futures and Options Terminology
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
Accrued Interest:
Interest earned between the
most recent interest payment and the present date but not yet
paid to the lender.
Actuals:
See Cash
Commodity.
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.
Against Actuals:
See Exchange
for Physicals.
Arbitrage:
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.
Brokerage Fee:
See Commission
Fee.
Brokerage House:
See Futures
Commission Merchant.
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.
Buying Hedge:
See Purchasing
Hedge.
C
Calendar Spread:
See Interdelivery
Spread or 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.
Clearing Corporation:
See Board
of Trade Clearing Corporation.
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 Price:
See Settlement
Price.
Closing Range:
A range of prices at which
buy and sell transactions took place during the market close.
COM Membership:
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 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.
Concurrent Indicators:
See Lagging
Indicators.
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.
Contract Grades:
See Deliverable
Grades.
Contract Month:
See Delivery
Month.
Controlled Account:
See Discretionary
Account.
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.
Cost of Carry (or Carry):
See Carrying
Charge.
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 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.
E
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:
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.
Exercise Price:
See Strike
Price.
Expanded Traded 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.
Extrinsic Value:
See Time
Value.
F
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 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.
Foreign Exchange Market:
See Forex
Market.
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.
G
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:
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.
Holder:
See Option
Buyer.
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.
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).
Initial Margin:
See Original
Margin
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.
Intrinsic
Value:
The amount by which an option
is in-the-money. See In-the-Money Option
Introducing Broker:
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.
L
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 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.
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®
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.
Long Hedge:
See Purchasing
Hedge.
Low:
The lowest price of the day
for a particular futures contract.
M
Maintenance:
A set minimum margin (per
outstanding futures contract) that a customer must maintain in
his margin account.
Managed Account:
See Clearing
Margin and Customer Margin.
Managed Futures:
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.
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 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.
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 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.
Negative Yield Curve:
See Yield
Curve.
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.
O
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
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.
Option Writer:
See Option
Seller.
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 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.
S
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.
Settle:
See Settlement
Price.
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.
Short Hedge:
See Selling
Hedge.
Simulation Analysis of Financial
Exposure:
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.
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 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.
Trading Limit:
See Position
Limit.
Treasury Bill:
See U.S.
Treasury Bill.
Treasury Bond:
See U.S.
Treasury Bond.
Treasury Note:
See
U
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.
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.
Versus Cash:
See Exchange
for Physical.
Verticle 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 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.
Wire House:
See Futures
Commission Merchant (FCM)
Writer:
See Option
Seller.
Y
Yield:
A measure of the annual return
on an investment.
Yield
Curve:
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.
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