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 ,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 (,000 or more) at
depository institutions, repurchase agreements with maturities longer
than one day at commercial banks, and institutional money market
accounts.
Moving-Average Charts: A statistical price analysis method of
recognizing different price trends. A moving average is calculated by
adding the prices for a predetermined number of days and then dividing
by the number of days.
Municipal Bonds: Debt securities issued by state and local
governments, and special districts and counties.
National
Futures Association (NFA): An industrywide, industry-supported,
self-regulatory organization for futures and options markets. The
primary responsibilities of the NFA are to enforce ethical standards and
customer protection rules, screen futures professionals for membership,
audit and monitor professionals for financial and general compliance
rules, and provide for arbitration of futures-related disputes.
Nearby
(Delivery) Month: The futures contract month closest to expiration.
Also referred to as spot month.
Notice
Day: According to Chicago Board of Trade rules, the second day of
the three-day delivery process when the clearing corporation matches the
buyer with the oldest reported long position to the delivering seller
and notifies both parties. See
First Notice Day.
Offer:
An expression indicating one's desire to sell a commodity at a given
price; opposite of bid.
Offset:
Taking a second futures or options position opposite to the initial or
opening position. See
Liquidate.
OPEC:
Organization of Petroleum Exporting Countries, emerged as the major
petroleum pricing power in1973, when the ownership of oil production in
the Middle East transferred from the operating companies to the
governments of the producing countries or to their national oil. Members
are: Algeria, Ecuador, Gabon, Indonesia, Iran, Iraq, Kuwait, Libya,
Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela.
Opening
Range: A range of prices at which buy and sell transactions took
place during the opening of the market.
Open
Interest: The total number of futures or options contracts of a
given commodity that have not yet been offset by an opposite futures or
option transaction nor fulfilled by delivery of the commodity or option
exercise. Each open transaction has a buyer and a seller, but for
calculation of open interest, only one side of the contract is counted.
Open
Market Operation: The buying and selling of government securities
Treasury bills, notes, and bonds by the Federal Reserve.
Open
Outcry: Method of public auction for making verbal bids and offers
in the trading pits or rings of futures exchanges.
Option:
A contract that conveys the right, but not the obligation, to buy or
sell a particular item at a certain price for a limited time. Only the
seller of the option is obligated to perform.
Option
Buyer: The purchaser of either a call or put option. Option buyers
receive the right, but not the obligation, to assume a futures position.
Also referred to as the holder.
Option
Premium: The price of an option the sum of money that the option
buyer pays and the option seller receives for the rights granted by the
option.
Option
Seller: The person who sells an option in return for a premium and
is obligated to perform when the holder exercises his right under the
option contract. Also referred to as the writer.
Option
Spread: The simultaneous purchase and sale of one or more options
contracts, futures, and/or cash positions.
Original
Margin: The amount a futures market participant must deposit into
his margin account at the time he places an order to buy or sell a
futures contract. Also referred to as initial margin.
Out-of-the-Money Option: An option with no intrinsic value, i.e., a
call whose strike price is above the current futures price or a put
whose strike price is below the current futures price.
Over-the-Counter (OTC) Market: A market where products such as
stocks, foreign currencies, and other cash items are bought and sold by
telephone and other means of communication.
P&S
(Purchase and Sale) Statement: A statement sent by a commission
house to a customer when his futures or options on futures position has
changed, showing the number of contracts bought or sold, the prices at
which the contracts were bought or sold, the gross profit or loss, the
commission charges, and the net profit or loss on the transactions.
Par:
The face value of a security. For example, a bond selling at par is
worth the same dollar amount it was issued for or at which it will be
redeemed at maturity.
Payment-In-Kind (PIK) Program: A government program in which farmers
who comply with a voluntary acreage-control program and set aside an
additional percentage of acreage specified by the government receive
certificates that can be redeemed for government-owned stocks of grain.
Performance Bond Margin: The amount of money deposited by both a
buyer and seller of a futures contract or an options seller to ensure
performance of the term of the contract. Margin in commodities is not a
payment of equity or down payment on the commodity itself, but rather it
is a security deposit. See Customer Margin and Clearing Margin.
Pit:
The area on the trading floor where futures and options on futures
contracts are bought and sold. Pits are usually raised octagonal
platforms with steps descending on the inside that permit buyers and
sellers of contracts to see each other.
Point-and-Figure Charts: Charts that show price changes of a minimum
amount regardless of the time period involved.
Position:
A market commitment. A buyer of a futures contract is said to have a
long position and, conversely, a seller of futures contracts is said to
have a short position.
Position
Day: According to the Chicago Board of Trade rules, the first day in
the process of making or taking delivery of the actual commodity on a
futures contract. The clearing firm representing the seller notifies the
Board of Trade Clearing Corporation that its short customers want to
deliver on a futures contract.
Position
Limit: The maximum number of speculative futures contracts one can
hold as determined by the Commodity Futures Trading Commission and/or
the exchange upon which the contract is traded. Also referred to as
trading limit.
Position
Trader: An approach to trading in which the trader either buys or
sells contracts and holds them for an extended period of time.
Premium:
(1) The additional payment allowed by exchange regulation for delivery
of higher-than-required standards or grades of a commodity against a
futures contract. (2) In speaking of price relationships between
different delivery months of a given commodity, one is said to be
""trading at a premium'' over another when its price is greater than
that of the other. (3) In financial instruments, the dollar amount by
which a security trades above its principal value. See
Option Premium.
Price
Discovery: The generation of information about ""future'' cash
market prices through the futures markets.
Price
Limit: The maximum advance or decline from the previous day's
settlement price permitted for a contract in one trading session by the
rules of the exchange. See also Variable Limit.
Price
Limit Order: A customer order that specifies the price at which a
trade can be executed.
Primary
Dealer: A designation given by the Federal Reserve System to
commercial banks or broker/dealers who meet specific criteria. Among the
criteria are capital requirements and meaningful participation in the
Treasury auctions.
Primary
Market: Market of new issues of securities.
Prime
Rate: Interest rate charged by major banks to their most
creditworthy customers.
Producer
Price Index (PPI): An index that shows the cost of resources needed
to produce manufactured goods during the previous month.
Pulpit:
A raised structure adjacent to, or in the center of, the pit or ring at
a futures exchange where market reporters, employed by the exchange,
record price changes as they occur in the trading pit.
Purchasing Hedge (or Long Hedge): Buying futures contracts to
protect against a possible price increase of cash commodities that will
be purchased in the future. At the time the cash commodities are bought,
the open futures position is closed by selling an equal number and type
of futures contracts as those that were initially purchased. Also
referred to as a buying hedge. See
Hedging.
Put
Option: An option that gives the option buyer the right but not the
obligation to sell (go "short'') the underlying futures contract at the
strike price on or before the expiration date.
Range
(Price): The price span during a given trading session, week, month,
year, etc.
Reciprocal of European Terms: One method of quoting exchange rates,
which measures the U.S. dollar value of one foreign currency unit, i.e.,
U.S. dollars per foreign units. See
European Terms.
Repurchase Agreements ( or Repo): An agreement between a seller and
a buyer, usually in U.S. government securities, in which the seller
agrees to buy back the security at a later date.
Reserve
Requirements: The minimum amount of cash and liquid assets as a
percentage of demand deposits and time deposits that member banks of the
Federal Reserve are required to maintain.
Resistance: A level above which prices have had difficulty
penetrating.
Resumption: The reopening the following day of specific futures and
options markets that also trade during the evening session at the
Chicago Board of Trade.
Reverse
Crush Spread: The sale of soybean futures and the simultaneous
purchase of soybean oil and meal futures. See
Crush Spread.
Runners:
Messengers who rush orders received by phone clerks to brokers for
execution in the pit.
Scalper:
A trader who trades for small, short-term profits during the course of a
trading session, rarely carrying a position overnight.
Secondary Market: Market where previously issued securities are
bought and sold.
Security:
Common or preferred stock; a bond of a corporation, government, or
quasi-government body.
Selling
Hedge (or Short Hedge): Selling futures contracts to protect against
possible declining prices of commodities that will be sold in the
future. At the time the cash commodities are sold, the open futures
position is closed by purchasing an equal number and type of futures
contracts as those that were initially sold. See
Hedging.
Settlement Price: The last price paid for a commodity on any trading
day. The exchange clearinghouse determines a firm's net gains or losses,
margin requirements, and the next day's price limits, based on each
futures and options contract settlement price. If there is a closing
range of prices, the settlement price is determined by averaging those
prices. Also referred to as settle or closing price.
