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