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