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.
