Add-on
Method: A method of paying interest where
the interest is added onto the principal at
maturity or interest payment dates.
Adjusted
Futures Price: The cash-price equivalent
reflected in the current futures price. This
is calculated by taking the futures price times
the conversion factor for the particular financial
instrument (e.g., bond or note) being delivered.
Arbitrage:
The simultaneous purchase and sale of similar
commodities in different markets to take advantage
of a price discrepancy.
Arbitration:
The procedure of settling disputes between members,
or between members and customers.
Assign:
To make an option seller perform his obligation
to assume a short futures position (as a seller
of a call option) or a long futures position
(as a seller of a put option).
Associated
Person (AP): An individual who solicits
orders, customers, or customer funds (or who
supervises persons performing such duties) on
behalf of a Futures Commission Merchant, an
Introducing Broker, a Commodity Trading Adviser,
or a Commodity Pool Operator.
Associate
Membership (CBOT): A Chicago Board of Trade
membership that allows an individual to trade
financial instrument futures and other designated
markets.
At-the-Money
Option: An option with a strike price that
is equal, or approximately equal, to the current
market price of the underlying futures contract.
Balance
of Payment: A summary of the international
transactions of a country over a period of time
including commodity and service transactions,
capital transactions, and gold movements.
Bar
Chart: A chart that graphs the high, low,
and settlement prices for a specific trading
session over a given period of time.
Basis:
The difference between the current cash price
and the futures price of the same commodity.
Unless otherwise specified, the price of the
nearby futures contract month is generally used
to calculate the basis.
Bear:
Someone who thinks market prices will decline.
Bear
Market: A period of declining market prices.
Bear
Spread: In most commodities and financial
instruments, the term refers to selling the
nearby contract month, and buying the deferred
contract, to profit from a change in the price
relationship.
Bid:
An expression indicating a desire to buy a commodity
at a given price; opposite of offer.
Board
of Trade Clearing Corporation: An independent
corporation that settles all trades made at
the Chicago Board of Trade acting as a guarantor
for all trades cleared by it, reconciles all
clearing member firm accounts each day to ensure
that all gains have been credited and all losses
have been collected, and sets and adjusts clearing
member firm margins for changing market conditions.
Also referred to as clearing corporation. See
Clearinghouse.
Book
Entry Securities: Electronically recorded
securities that include each creditor's name,
address, Social Security or tax identification
number, and dollar amount loaned, (i.e., no
certificates are issued to bond holders, instead,
the transfer agent electronically credits interest
payments to each creditor's bank account on
a designated date).
Broker:
A company or individual that executes futures
and options orders on behalf of financial and
commercial institutions and/or the general public.
Bull
Spread: In most commodities and financial
instruments, the term refers to buying the nearby
month, and selling the deferred month, to profit
from the change in the price relationship.
Butterfly
Spread: The placing of two interdelivery
spreads in opposite directions with the center
delivery month common to both spreads.
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.
Intrinsic
Value: The amount by which an option is
in-the-money. See In-the-Money Option.
Introducing
Broker (IB): A person or organization that
solicits or accepts orders to buy or sell futures
contracts or commodity options but does not
accept money or other assets from customers
to support such orders.
Inverted
Market: A futures market in which the relationship
between two delivery months of the same commodity
is abnormal.
Invisible
Supply: Uncounted stocks of a commodity
in the hands of wholesalers, manufacturers,
and producers that cannot be identified accurately;
stocks outside commercial channels but theoretically
available to the market.
Lagging
Indicators: Market indicators showing the
general direction of the economy and confirming
or denying the trend implied by the leading
indicators. Also referred to as concurrent indicators.
Last
Trading Day: According to the Chicago Board
of Trade rules, the final day when trading may
occur in a given futures or options contract
month. Futures contracts outstanding at the
end of the last trading day must be settled
by delivery of the underlying commodity or securities
or by agreement for monetary settlement (in
some cases by EFPs).
Leading
Indicators: Market indicators that signal
the state of the economy for the coming months.
Some of the leading indicators include: average
manufacturing workweek, initial claims for unemployment
insurance, orders for consumer goods and material,
percentage of companies reporting slower deliveries,
change in manufacturers' unfilled orders for
durable goods, plant and equipment orders, new
building permits, index of consumer expectations,
change in material prices, prices of stocks,
change in money supply.
Leverage:
The ability to control large dollar amounts
of a commodity with a comparatively small amount
of capital.
Limit
Order: An order in which the customer sets
a limit on the price and/or time of execution.
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.
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.
Money
Supply: The amount of money in the economy,
consisting primarily of currency in circulation
plus deposits in banks: M-1–U.S. money supply
consisting of currency held by the public, traveler's
checks, checking account funds, NOW and super-NOW
accounts, automatic transfer service accounts,
and balances in credit unions. M-2–U.S. money
supply consisting of M-1 plus savings and small
time deposits (less than $100,000) at depository
institutions, overnight repurchase agreements
at commercial banks, and money market mutual
fund accounts. M-3 –U.S. money supply consisting
of M-2 plus large time deposits ($100,000 or
more) at depository institutions, repurchase
agreements with maturities longer than one day
at commercial banks, and institutional money
market accounts.
Moving-Average
Charts: A statistical price analysis method
of recognizing different price trends. A moving
average is calculated by adding the prices for
a predetermined number of days and then dividing
by the number of days.
Municipal
Bonds: Debt securities issued by state and
local governments, and special districts and
counties.
National
Futures Association (NFA): An industrywide,
industry-supported, self-regulatory organization
for futures and options markets. The primary
responsibilities of the NFA are to enforce ethical
standards and customer protection rules, screen
futures professionals for membership, audit
and monitor professionals for financial and
general compliance rules, and provide for arbitration
of futures-related disputes.
Nearby
(Delivery) Month: The futures contract month
closest to expiration. Also referred to as spot
month.
Notice
Day: According to Chicago Board of Trade
rules, the second day of the three-day delivery
process when the clearing corporation matches
the buyer with the oldest reported long position
to the delivering seller and notifies both parties.
See First Notice Day.
Offer:
An expression indicating one's desire to sell
a commodity at a given price; opposite of bid.
Offset:
Taking a second futures or options position
opposite to the initial or opening position.
See Liquidate.
OPEC:
Organization of Petroleum Exporting Countries,
emerged as the major petroleum pricing power
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.
S
Scalper:
A trader who trades for small, short-term profits
during the course of a trading session, rarely
carrying a position overnight.
Secondary
Market: Market where previously issued securities
are bought and sold.
Security:
Common or preferred stock; a bond of a corporation,
government, or quasi-government body.
Selling
Hedge (or Short Hedge): Selling futures
contracts to protect against possible declining
prices of commodities that will be sold in the
future. At the time the cash commodities are
sold, the open futures position is closed by
purchasing an equal number and type of futures
contracts as those that were initially sold.
See Hedging.
Settlement
Price: The last price paid for a commodity
on any trading day. The exchange clearinghouse
determines a firm's net gains or losses, margin
requirements, and the next day's price limits,
based on each futures and options contract settlement
price. If there is a closing range of prices,
the settlement price is determined by averaging
those prices. Also referred to as settle or
closing price.
Short:
(noun) One who has sold futures contracts or
plans to purchase a cash commodity. (verb) Selling
futures contracts or initiating a cash forward
contract sale without offsetting a particular
market position.
Simulation
Analysis of Financial Exposure (SAFE): A
sophisticated computer risk-analysis program
that monitors the risk of clearing members and
large-volume traders at the Chicago Board of
Trade. It calculates the risk of change in market
prices or volatility to a firm carrying open
positions.
Speculator:
A market participant who tries to profit from
buying and selling futures and options contracts
by anticipating future price movements. Speculators
assume market price risk and add liquidity and
capital to the futures markets.
Spot:
Usually refers to a cash market price for a
physical commodity that is available for immediate
delivery.
Spot
Month: See Nearby (Delivery) Month.
Spread:
The price difference between two related markets
or commodities.
Spreading:
The simultaneous buying and selling of two related
markets in the expectation that a profit will
be made when the position is offset. Examples
include: buying one futures contract and selling
another futures contract of the same commodity
but different delivery month; buying and selling
the same delivery month of the same commodity
on different futures exchanges; buying a given
delivery month of one futures market and selling
the same delivery month of a different, but
related, futures market.
Steer/Corn
Ratio: The relationship of cattle prices
to feeding costs. It is measured by dividing
the price of cattle ($/hundredweight) by the
price of corn ($/bushel). When corn prices are
high relative to cattle prices, fewer units
of corn equal the dollar value of 100 pounds
of cattle. Conversely, when corn prices are
low in relation to cattle prices, more units
of corn are required to equal the value of 100
pounds of beef. See Feed Ratio.
Stock
Index: An indicator used to measure and
report value changes in a selected group of
stocks. How a particular stock index tracks
the market depends on its composition the sampling
of stocks, the weighting of individual stocks,
and the method of averaging used to establish
an index.
Stock
Market: A market in which shares of stock
are bought and sold.
Stop-Limit
Order: A variation of a stop order in which
a trade must be executed at the exact price
or better. If the order cannot be executed,
it is held until the stated price or better
is reached again.
Stop
Order: An order to buy or sell when the
market reaches a specified point. A stop order
to buy becomes a market order when the futures
contract trades (or is bid) at or above the
stop price. A stop order to sell becomes a market
order when the futures contract trades (or is
offered) at or below the stop price.
Strike
Price: The price at which the futures contract
underlying a call or put option can be purchased
(if a call) or sold (if a put). Also referred
to as exercise price.
Supply,
Law of: The relationship between product
supply and its price.
Support:
The place on a chart where the buying of futures
contracts is sufficient to halt a price decline.
Suspension:
The end of the evening session for specific
futures and options markets traded at the Chicago
Board of Trade.
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.
