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