Glossary of Futures Terminology
This glossary was extracted from the Chicago Board of
Trade's Commodity Trading Manual, which is produced by the Market Development
Department of the exchange.
Accrued Interest - Interest earned between the
most recent interest payment and the present date but not yet paid to the lender.
Actuals - See Cash Commodity.
Add-on Method - A method of paying interest where
the interest is added onto the principal at maturity or interest payment dates.
Adjusted Futures Price - The cash-price equivalent
reflected in the current futures price. This is calculated by taking the futures price
times the conversion factor for the particular financial instrument (e.g., bond or note)
Against Actuals - See Exchange for Physicals.
Arbitrage - The simultaneous purchase and sale of
similar commodities in different markets to take advantage of price discrepancy.
Arbitration - The procedure of settling disputes
between members, or between members and customers.
Assign - To make an option seller perform his
obligation to assume a short futures position (as a seller of a call option) or a long
futures position (as a seller of a put option).
Associated Person (AP) - An individual who
solicits orders, customers, or customer funds (or who supervises persons performing such
duties) on behalf of a Futures Commission Merchant, an Introducing Broker, a Commodity
Trading Adviser, or a Commodity Pool Operator.
Associate Membership - A Chicago Board of Trade
membership that allows an individual to trade financial instrument futures and other
At-the-Money Option - An option with a strike
price that is equal, or approximately equal, to the current market price of the underlying
Balance of Payment - A summary of the
international transactions of a country over a period of time including commodity and
service transactions, and gold movements.
Bar Chart - A chart that graphs the high, low, and
settlement prices for a specific trading session over a given period of time.
Basis - The difference between the current cash
price and the futures price of the same commodity. Unless otherwise specified, the price
of the nearby futures contract month is generally used to calculate the basis.
Bear - Someone who thinks market prices will
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
Brokerage Fee - See Commission Fee.
Brokerage House - See Futures Commission Merchant.
Bull - Someone who thinks market prices will rise.
Bull Market - A period of rising market prices.
Bull Spread - In most commodities and financial
instruments, the term refers to buying the nearby month, and selling the deferred month,
to profit from the change in the price relationship.
Butterfly Spread - The placing of two
interdelivery spreads in opposite directions with the center delivery month common to both
Buying Hedge - See Purchasing Hedge.
Calendar Spread - See Interdelivery Spread or Horizontal Spread.
Call Option - An option that gives the buyer the
right, but not the obligation, to purchase (go ?long") the underlying futures
contract at the strike price on or before the expiration date.
Canceling Order - An order that deletes a
customer's previous order.
Carrying Charge - For
physical commodities such as grains and metals, the cost of storage space, insurance, and
finance charges incurred by holding a physical commodity. In interest rate futures
markets, it refers to the differential between the yield on a cash instrument and the cost
of funds necessary to buy the instrument. Also referred to as cost of carry or
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
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
Cheapest to Deliver - A method to determine which
particular cash debt instrument is most profitable to deliver against a futures contract.
Clear - The process by which a clearinghouse
maintains records of all trades and settles margin flow on a daily mark-to-market basis
for its clearing member.
Clearing Corporation - See Board of Trade Clearing Corporation.
Clearinghouse - An
agency or separate corporation of a futures exchange that is responsible for settling
trading accounts, clearing trades, collecting and maintaining margin monies, regulating
delivery, and reporting trading data. Clearinghouses act as third parties to all futures
and options contractsacting 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
Clearing Member - A member of an exchange
clearinghouse. Memberships in clearing organizations are usually held by companies.
Clearing members are responsible for the financial commitments of customers that clear
through their firm.
Closing Price - See Settlement Price.
Closing Range - A range of prices at which buy and
sell transactions took place during the market close.
COM Membership - A Chicago Board of Trade
membership that allows an individual to trade contracts listed in the commodity options
Commission Fee - A fee
charged by a broker for executing a transaction. Also referred to as brokerage fee.
Commission House - See Futures Commission Merchant (FCM).
Commodity - An article of commerce or a product
that can be used for commerce. In a narrow sense, products traded on an authorized
commodity exchange. The types of commodities include agricultural products, metals,
petroleum, foreign currencies, and financial instruments and index, to name a few.
Commodity Credit Corp. - A branch of the U.S.
Department of Agriculture, established in 1933, that supervises the government's farm loan
and subsidy programs.
Commodity Futures Trading Commission (CFTC) - A
federal regulatory agency established under the Commodity Futures Trading Commission Act,
as amended in 1974, that oversees futures trading in the United States. The commission is
comprised of five commissioners, one of whom is designated as chairman, all appointed by
the President subject to Senate confirmation, and is independent of all cabinet
Commodity Pool - An enterprise in which funds
contributed by a number of persons are combined for the purpose of trading futures
contracts or commodity options.
Commodity Pool Operator - An individual or
organization that operates or solicits funds for a commodity pool.
Commodity Trading Adviser - A person who, for
compensation or profit, directly or indirectly advises others as to the value or the
advisability of buying or selling futures contracts or commodity options. Advising
indirectly includes exercising trading authority over a customer's account as well as
providing recommendations through written publications or other media.
Computerized Trading Reconstruction System - A
Chicago Board of Trade computerized surveillance program that pinpoints in any trade the
traders, the contract, the quantity, the price, and time of execution to the nearest
Concurrent Indicators - See Lagging Indicators.
Consumer Price Index (CPI) - A major inflation
measure computed by the U.S. Department of Commerce. It measures the change in prices of a
fixed market basket of some 385 goods and services in the previous month.
Contract Grades - See Deliverable Grades.
Contract Month - See Delivery Month.
Controlled Account - See Discretionary Account.
Convergence - A term referring to cash and futures
prices tending to come together (i.e., the basis approaches zero) as the futures contract
Conversion Factor - A factor used to equate the
price of T-bond and T-note futures contracts with the various cash T-bonds and T-notes
eligible for delivery. This factor is based on the relationship of the cash-instrument
coupon to the required 8 percent deliverable grade of a futures contract as well as taking
into account the cash instrument's maturity or call.
Cost of Carry (or Carry) - See Carrying Charge.
Coupon - The interest rate on a debt instrument
expressed in terms of a percent on an annualized basis that the issuer guarantees to pay
the holder until maturity.
Crop (Marketing) Year - The time span from harvest
to harvest for agricultural commodities. The crop marketing year varies slightly with each
ag commodity, but it tends to begin at harvest and end before the next year's harvest,
e.g., the marketing year for soybeans begins September 1 and ends August 31. The futures
contract month of November represents the first major new-crop marketing month, and the
contract month of July represents the last major old-crop marketing month for soybeans.
Crop Reports - Reports compiled by the U.S.
Department of Agriculture on various ag commodities that are released throughout the year.
Information in the reports includes estimates on planted acreage, yield, and expected
production, as well as comparison of production from previous years.
Cross-Hedging - Hedging a cash commodity using a
different but related futures contract when there is no futures contract for the cash
commodity being hedged and the cash and futures markets follow similar price trends (e.g.,
using soybean meal futures to hedge fish meal).
Crush Spread - The
purchase of soybean futures and the simultaneous sale of soybean oil and meal futures. See
Current Yield - The ratio of the coupon to the
current market price of the debt instrument
Customer Margin - Within
the futures industry, financial guarantees required of both buyers and sellers of futures
contracts and sellers of options contracts to ensure fulfilling of contract obligations.
FCMs are responsible for overseeing customer margin accounts. Margins are determined on
the basis of market risk and contract value. Also referred to as performance-bond margin.
See Clearing Margin.
Daily Trading Limit - The maximum price range set
by the exchange cash day for a contract.
Day Traders - Speculators who take positions in
futures or options contracts and liquidate them prior to the close of the same trading
Deferred (Delivery) Month - The more distant
month(s) in which futures trading is taking place, as distinguished from the nearby
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
Delivery Month - A
specific month in which delivery may take place under the terms of a futures contract.
Also referred to as contract month.
Delivery Points. - The locations and facilities
designated by a futures exchange where stocks of a commodity may be delivered in
fulfillment of a futures contract, under procedures established by the exchange.
Delta - A measure of how much an option premium
changes, given a unit change in the underlying futures price. Delta often is interpreted
as the probability that the option will be in-the-money by expiration.
Demand, Law of - The relationship between product
demand and price.
Differentials - Price differences between classes,
grades, and delivery locations of various stocks of the same commodity.
Discount Method - A method of paying interest by
issuing a security at less than par and repaying par value at maturity. The difference
between the higher par value and the lower purchase price is the interest.
Discount Rate - The interest rate charged on loans
by the Federal Reserve Bank.
- 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
Econometrics - The application of statistical and
mathematical methods in the field of economics to test and quantify economic theories and
the solutions to economic problems.
Equilibrium Price - The market price at which the
quantity supplied of a commodity equals the quantity demanded.
Eurodollars - U.S. dollars on deposit with a bank
outside of the United States and, consequently, outside the jurisdiction of the United
States. The bank could be either a foreign bank or a subsidiary of a U.S. bank.
European Terms - A method of quoting exchange
rates, which measures the amount of foreign currency needed to buy one U.S. dollar, i.e.,
foreign currency unit per dollar. See Reciprocal
of European Terms.
Exchange for Physicals - A
transaction generally used by two hedgers who want to exchange futures for cash positions.
Also referred to as "against actuals" or "versus cash".
Exercise - The action taken by the holder of a
call option if he wishes to purchase the underlying futures contract or by the holder of a
put option if he wishes to sell the underlying futures contract.
Exercise Price - See Strike Price.
Expanded Traded Hours - Additional trading hours
of specific futures and options contracts at the Chicago Board of Trade that overlap with
business hours in other time zones.
Expiration Date - Options on futures generally
expire on a specific date during the month preceding the futures contract delivery month.
For example, an option on a March futures contract expires in February but is referred to
as a March option because its exercise would result in a March futures contract position.
Extrinsic Value - See Time Value.
Face Value - The amount of money printed on the
face of the certificate of a security; the original dollar amount of indebtedness
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
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
Fill-or Kill - A customer order that is a price
limit order that must be filled immediately or canceled.
Financial Analysis Auditing Compliance Tracking System
(FACTS) - The National Futures Association's computerized system of maintaining
financial records of its member firms and monitoring their financial conditions.
Financial Instrument - There are two basic types -
(1) a debt instrument, which is a loan with an agreement to pay back funds with interest;
(2) an equity security, which is share or stock in a company.
First Notice Day - According to Chicago Board of
Trade rules, the first day on which a notice of intent to deliver a commodity in
fulfillment of a given month's futures contract can be made by the clearinghouse to a
buyer. The clearinghouse also informs the sellers who they have been matched up with.
Floor Broker (FB) - An individual who executes
orders for the purchase or sale of any commodity futures or options contract on any
contract market for any other person.
Floor Trader (FT) - An individual who executes
trades for the purchase or sale of any commodity futures or options contract on any
contract market for such individual's own account.
Foreign Exchange Market - See Forex Market.
Forex Market - An
over-the-counter market where buyers and sellers conduct foreign exchange business by
telephone and other means of communication. Also referred to as foreign exchange market.
Forward (Cash) Contract
- A cash contract in which a seller agrees to deliver a specific cash commodity to a
buyer sometime in the future. Forward contracts, in contrast to futures contracts, are
privately negotiated and are not standardized.
Full Carrying Charge Market - A futures market
where the price difference between delivery months reflects the total costs of interest,
insurance, and storage.
Full Membership (CBOT) - A Chicago Board of Trade
membership that allows an individual to trade all futures and options contracts listed by
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
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
Grain Terminal - Large grain elevator facility
with the capacity to ship grain by rail and/or barge to domestic or foreign markets.
Gross Domestic Product - The value of all final
goods and services produced by an economy over a particular time period, normally a year.
Gross National Product - Gross Domestic Product
plus the income accruing to domestic residents as a result of investments abroad less
income earned in domestic markets accruing to foreigners abroad.
Gross Processing Margin - The difference between
the cost of soybeans and the combined sales income of the processed soybean oil and meal.
Hedger - An individual or company owning or
planning to own a cash commoditycorn, soybeans, wheat, U.S. Treasury bonds, notes,
bills etc. and concerned that the cost of the commodity may change before either
buying or selling it in the cash market. A hedger achieves protection against changing
cash prices by purchasing (selling) futures contracts of the same or similar commodity and
later offsetting that position by selling (purchasing) futures contracts of the same
quantity and type as the initial transaction.
Hedging - The practice of
offsetting the price risk inherent in any cash market position by taking an equal but
opposite position in the futures market. Hedgers use the futures markets to protect their
business from adverse price changes. See Selling
(Short) Hedge and Purchasing (Long) Hedge.
High - The highest price of the day for a
particular futures contract.
Hog/Corn Ratio - The
relationship of feeding costs to the dollar value of hogs. It is measured by dividing the
price of hogs ($/hundredweight) by the price of corn ($/bushel). When corn prices are high
relative to pork prices, fewer units of corn equal the dollar value of 100 pounds of pork.
Conversely, when corn prices are low in relation to pork prices, more units of corn are
required to equal the value of 100 pounds of pork. See Feed
Holder - See Option
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 contract in the index, debt, and energy
markets category (gold, municipal bond index, 30-day fed funds, and stock index futures).
Initial Margin - See Original Margin
Intercommodity Spread - The purchase of a given
delivery month of one futures market and the simultaneous sale of the same delivery month
of a different, but related, futures market.
- 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
Introducing Broker - A person or organization that
solicits or accepts orders to buy or sell futures contracts or commodity options but does
not accept money or other assets from customers to support such orders.
Inverted Market - A futures market in which the
relationship between two delivery months of the same commodity is abnormal.
Invisible Supply - Uncounted stocks of a commodity
in the hands of wholesalers, manufacturers, and producers that cannot e identified
accurately; stocks outside commercial channels but theoretically available to the market.
Lagging Indicators - Market
indicators showing the general direction of the economy and confirming or denying the
trend implied by the leading indicators. Also referred to as concurrent indicators.
Last Trading Day - According to the Chicago Board
of Trade rules, the final day when trading may occur in a given futures or option contract
month. Futures contracts outstanding at the end of the last trading day must be settled by
delivery of the underlying commodity or securities or by agreement for monetary settlement
(in some cases by EFPs).
Leading Indicators - Market indicators that signal
the state of the economy for the coming months. Some of the leading indicators include -
average manufacturing workweek, initial claims for unemployment insurance, orders for
consumer goods and material, percentage of companies reporting slower deliveries, change
in manufacturers' unfilled orders for durable goods, plant and equipment orders, new
building permits, index of consumer expectations, change in material prices, prices of
stocks, change in money supply.
Leverage - The ability to control large dollar
amounts of a commodity with a comparatively small amount of capital.
Limit Order - An order in which the customer sets
a limit on the price and/or time of execution.
Limits - See Position Limit, Price Limit, Variable
Linkage - The ability to buy (sell) contracts on
one exchange (such as the Chicago Mercantile Exchange ) and later sell (buy) them on
another exchange (such as the Singapore International Monetary Exchange.)
Liquid - A characteristic of a security or
commodity market with enough units outstanding to allow large transactions without a
substantial change in price. Institutional investors are inclined to seek out liquid
investments so that their trading activity will not influence the market price.
Liquidate - Selling (or
purchasing) futures contracts of the same delivery month purchased (or sold) during an
earlier transaction or making (or taking) delivery of the cash commodity represented by
the futures contract. See Offset.
Liquidity Data Bank® - A computerized profile of
CBOT market activity, used by technical traders to analyze price trends and develop
trading strategies. There is a specialized display of daily volume data and time
distribution of prices for every commodity traded on the Chicago Board of Trade.
Loan Program - A federal program in which the
government lends money at preannounced rates to farmers and allows them to use the crops
they plant for the upcoming crop year as collateral. Default on these loans is the primary
method by which the government acquires stock of agricultural commodities.
Loan Rate - The amount lent per unit of a
commodity to farmers.
Long - One who has bought futures contracts or
owns a cash commodity.
Long Hedge - See Purchasing Hedge.
Low - The lowest price of the day for a particular
Maintenance - A set minimum margin (per
outstanding futures contract) that a customer must maintain in his margin account.
Managed Account - See Clearing Margin and Customer Margin.
Managed Futures - Represents an industry comprised
of professional money mangers known as commodity trading advisors who manage client assets
on a discretionary basis, using global futures markets as an investment medium.
Margin - See Clearing Margin and Customer Margin.
Margin Call - A call from a clearinghouse to a
clearing member, or from a brokerage firm to a customer, to bring margin deposits up to a
required minimum level.
Market Information Data Inquiry System( MIDIS) - Historical
Chicago Board of Trade price, volume, open interest data and other market information
accessible by computers within the Chicago Board of Trade building.
Market Order - An order to buy or sell a futures
contract of a given delivery month to be filled at the best possible price and as soon as
Market Price Reporting and Information Systems - The
Chicago Board of Trade's computerized price-reporting system.
Market Profile® - A Chicago Board of Trade
information service that helps technical traders analyze price trends. Market Profile
consists of the Time and Sales ticker and the Liquidity Data Bank®.
Market Reporter - A person employed by the
exchange and located in or near the trading pit who records prices as they occur during
Marking-to-Market - To debit or credit on a daily
basis a margin account based on the close of that day's trading session. In this way,
buyers an sellers are protected against the possibility of contract default.
Minimum Price Fluctuation - See Tick.
Money Supply - The amount of money in the economy,
consisting primarily of currency in circulation plus deposits in banks - M-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 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-3U.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
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 riles, screen futures professional for membership, audit and monitor
professionals for financial and general compliance rules and provide for arbitration of
Nearby (Delivery) Month - The
futures contract month closest to expiration. Also referred to as spot month.
Negative Yield Curve - See Yield Curve.
Notice Day - According to Chicago Board of Trade
rules, the second day of the three-day delivery process when the clearing corporation
matches the buyer with the oldest reported long position to the delivering seller and
notifies both parties. See First Notice Day.
Offer - An expression indicating one's desire to
sell a commodity at a given price; opposite of bid.
Offset - Taking a second
futures or options position opposite to the initial or opening position. See Liquidate.
OPEC - Organization of Petroleum Exporting
Countries, emerged as the major petroleum pricing power in 1973, when the ownership of oil
production in the Middle East transferred from the operating companies to the governments
of the producing countries or to their national oil companies. Members are: Algeria,
Ecuador, Gabon, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the
United Arab Emirates, and Venezuela.
Opening Range - A range of prices at which buy an
sell transactions took place during the opening of the market.
Open Interest - The total number of futures or
options contracts of a given commodity that have not yet been offset by an opposite
futures or option transaction nor fulfilled by delivery of the commodity or option
exercise. Each open transaction has a buyer and a seller, but for calculation of open
interest, only one side of the contract is counted.
Open Market Operation - The buying and selling of
government securitiesTreasury bills, notes, and bondsby 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 optionthe sum of money that the option buyer pays and the option seller
receives for the rights granted by the option.
Option Seller - The
person who sells an option in return for a premium and is obligated to perform when the
holder exercises his right under the option contract. Also referred to as the writer.
Option Spread - The simultaneous purchase and sale
of one or more options contracts, futures, and/or cash positions.
Option Writer - See Option Seller.
Original Margin - The
amount a futures market participant must deposit into his margin account at the time he
places an order to buy or sell a futures contract. Also referred to as initial margin.
Out-of-the-Money Option - An option with no
intrinsic value, i.e., a call whose strike price is above the current futures price or a
put whose strike price is below the current futures price.
Over-the-Counter Market - A market where products
such as stocks, foreign currencies, and other cash items are bought and sold by telephone
and other means of communications.
Purchase and Sell Statement - A Statement sent by
a commission house to a customer when his futures or options on futures position ha
changed, showing the number of contracts bought or sold, the prices at which the contracts
were bought or sold, the gross profit or loss, the commission charges, and the net profit
or loss on the transaction.
Par - The face value of a security. For example, a
bond selling at par is worth the same dollar amount it was issued for or at which it will
be redeemed at maturity.
Payment-In-Kind Program - A government program in
which farmers who comply with a voluntary acreage-control program and set aside an
additional percentage of acreage specified by the government receive certificates that can
be redeemed for government-owned stocks of grain.
Performance Bond Margin - The amount of money
deposited by both buyer and seller of a futures contract or an options seller to ensure
performance of the term of the contract. Margin in commodities is not a payment of equity
or down payment on the commodity itself, but rather it is a security deposit. See Customer Margin and Clearing Margin
Pit - The area on the trading floor where futures
and options on futures contracts are bought and sold. Pits are usually raised octagonal
platforms with steps descending on the inside that permit buyers and sellers of contracts
to see each other.
Point-and-Figure Charts - Charts that show price
changes of a minimum amount regardless of the time period involved.
Position - A market commitment. A buyer of a
futures contract is said to have a long position and, conversely, a seller of futures
contracts is said to have a short position.
Position Day - According to the Chicago Board of
Trade rules, the first day in the process of making or taking delivery of the actual
commodity on a futures contract. The clearing firm representing the seller notifies the
Board of Trade Clearing Corporation that its short customers want to deliver on a futures
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 declinefrom the previous day's settlementpermitted 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
Primary Market - Market of new issues of
Prime Rate - Interest rate charged by major banks
to their most creditworthy customers.
Producer Price Index (PPI) - An index that shows
the cost of resources needed to produce manufactured goods during the previous month.
Pulpit - A raised structure adjacent to, or in the
center of, the pit or ring at a futures exchange where market reporters, employed by the
exchange, record price changes as they occur in the trading pit.
Purchasing Hedge or Long
Hedge - Buyer futures contracts to protect against a possible price increase of
cash commodities that will e purchased in the future. At the time the cash commodities are
bought, the open futures position is closed by selling an equal number and type of futures
contracts as those that were initially purchased. Also referred to as a buying hedge. See Hedging.
Put Option - An option that gives the option buyer
the right but not the obligation to sell (go "short") the underlying futures
contract at the strike price on or before the expiration date.
Range (Price) - The price span during a given
trading session, week, month, year, etc.
Reciprocal of European
Terms - One method of quoting exchange rates, which measured the U.S. dollar value
of one foreign currency unit, i.e., U.S. dollars per foreign units. See European Terms.
Repurchase Agreements or (Repo) - An agreement
between a seller and a buyer, usually in U.S. government securities, in which the seller
agrees to buy back the security at a later date.
Reserve Requirements - The minimum amount of cash
and liquid assets as a percentage of demand deposits and time deposits that member banks
of the Federal Reserve are required to maintain.
Resistance - A level above which prices have had
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
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
Secondary Market - Market where previously issued
securities are bought and sold.
Security - Common or preferred stock; a bond of a
corporation, government, or quasi- government body.
Selling Hedge or Short Hedge
- Selling futures contracts to protect against possible declining prices of
commodities that will be sold in the future. At the time the cash commodities are sold,
the open futures position is closed by purchasing an equal number and type of futures
contracts as those that were initially sold. See Hedging.
Settle - See Settlement Price.
Settlement Price - The
last price paid for a commodity on any trading day. The exchange clearinghouse determines
a firm's net gains or losses, margin requirements, and the next day's price limits, based
on each futures and options contract settlement price. If there is a closing range of
prices, the settlement price is determined by averaging those prices. Also referred to as
settle or closing price.
Short (noun) - One who has sold futures contracts
or plans to purchase a cash commodity.
Short (verb) - Selling futures
contracts or initiating a cash forward contract sale without offsetting a particular
Short Hedge - See Selling Hedge.
Simulation Analysis of Financial Exposure - A
sophisticated computer risk-analysis program that monitors the risk of clearing member and
large-volume traders at the Chicago Board of Trade. It calculates the risk of change in
market prices or volatility to a firm carrying open positions.
Speculator - A market participant who tries to
profit from buying and selling futures and options contracts by anticipating future price
movements. Speculators assume market price risk and add liquidity and capital to the
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 compositionthe sampling of stocks, the weighing of
individual stocks, and the method of averaging used to establish an index.
Stock Market - A market in which shares of stock
are bought and sold.
Stop-Limit Order - A variation of a stop order in
which a trade must be executed at the exact price or better. If the order cannot be
executed, it is held until the stated price or better is reached again.
Stop Order - An order to buy or sell when the
market reaches a specified point. A stop order to buy becomes a market order when the
futures contract trades (or is bid) at or above the stop price. A stop order to sell
becomes a market order when the futures contract trades (or is offered) at or below the
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.
Time Limit Order - A customer order that
designates the time during which it can be executed.
Time and Sales Ticker - Part of the Chicago Board
of Trade Market Profile® system consisting of an on-line graphic service that transmits
price and time information throughout the day.
Time-Stamped - Part of the order-routing process
in which the time of day is stamped on an order. An order is time-stamped when it is (1)
received on the trading floor, and (2) completed.
Time Value - The amount of
money option buyer are willing to pay for an option in the anticipation that, over time, a
change in the underlying futures price will cause the option to increase in value. In
general, an option premium is the sum of time value and intrinsic value. Any amount by
which an option premium exceeds the option's intrinsic value can be considered time value.
Also referred to as extrinsic value.
Trade Balance - The difference between a nation's
imports and exports of merchandise.
Trading Limit - See Position Limit.
Treasury Bill - See U.S. Treasury Bill.
Treasury Bond - See U.S. Treasury Bond.
Treasury Note - See U.S. Treasury Note.
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
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
Variation Margin - During periods of great market
volatility or in the case of high-risk accounts, additional margin deposited by a clearing
member firm to an exchange.
Versus Cash - See Exchange for Physical.
Verticle Spread - Buying and selling puts or calls
of the same expiration month but different strike prices.
Volatility - A measurement of the change in price
over a given period. It is often expressed as a percentage and computed as the annualized
standard deviation of the percentage change in daily price.
Volume - The number of purchases or sales of a
commodity futures contract made during a specific period of time, often the total
transactions for one trading day.
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
Wire House - See Futures
Commission Merchant (FCM)
Writer - See Option Seller.
Yield - A measure of the annual return on an
Yield Curve - A chart in
which the yield level is plot on the vertical axis and the term to maturity of debt
instruments of similar creditworthiness is plotted n the horizontal axis. The yield curve
is positive when long-term rates are higher than short-term rates However, yield curve is
negative or inverted.
Yield to Maturity - The rate of return an investor
receives if a fixed-income security is held to maturity.