Add-on Method: A method of paying interest where the
interest is added onto the principal at maturity or interest payment
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
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
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.
Calendar Spread: See Interdelivery Spread and
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
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
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
Cheap: Colloquialism implying that a commodity is
Cheapest to Deliver: A method to determine which
particular cash debt instrument is most profitable to deliver against a
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
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
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
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
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
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
Crush Spread: The purchase of soybean futures and the
simultaneous sale of soybean oil and meal futures. See Reverse
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
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
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
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
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
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
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
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
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 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
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
Futures Contract: A legally binding agreement, made
on the trading floor of a futures exchange, to buy or sell a commodity or
financial instrument sometime in the future. Futures contracts are
standardized according to the quality, quantity, and delivery time and
location for each commodity. The only variable is price, which is
discovered on an exchange trading floor.
Futures Exchange: A central marketplace with
established rules and regulations where buyers and sellers meet to trade
futures and options on futures contracts.
Gamma: A measurement of how fast delta changes, given
a unit change in the underlying futures price.
GIM Membership (CBOT): A Chicago Board of Trade
membership that allows an individual to trade all futures contracts listed
in the government instrument market category.
GLOBEX®: A global after-hours electronic trading
Grain Terminal: Large grain elevator facility with
the capacity to ship grain by rail and/or barge to domestic or foreign
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
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
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
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
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
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
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
Long: One who has bought futures contracts or owns a
cash commodity. Long Hedge: See Purchasing
Low: The lowest price of the day for a particular
Maintenance Margin: A set minimum margin (per
outstanding futures contract) that a customer must maintain in his margin
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
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
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
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
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 industry wide,
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
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
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
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
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
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
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
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
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
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
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
Repurchase Agreements ( or Repo): An agreement
between a seller and a buyer, usually in U.S. government securities, in
which the seller agrees to buy back the security at a later date.
Reserve Requirements: The minimum amount of cash and
liquid assets as a percentage of demand deposits and time deposits that
member banks of the Federal Reserve are required to maintain.
Resistance: A level above which prices have had
Resumption: The reopening the following day of
specific futures and options markets that also trade during the evening
session at the Chicago Board of Trade.
Reverse Crush Spread: The sale of soybean futures and
the simultaneous purchase of soybean oil and meal futures. See Crush
Runners: Messengers who rush orders received by phone
clerks to brokers for execution in the pit.
Scalper: A trader who trades for small, short-term
profits during the course of a trading session, rarely carrying a position
Secondary Market: Market where previously issued
securities are bought and sold.
Security: Common or preferred stock; a bond of a
corporation, government, or quasi-government body.
Selling Hedge (or Short Hedge): Selling futures
contracts to protect against possible declining prices of commodities that
will be sold in the future. At the time the cash commodities are sold, the
open futures position is closed by purchasing an equal number and type of
futures contracts as those that were initially sold. See Hedging.
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
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
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
Trade Balance: The difference between a nation's
imports and exports of merchandise. Trading Limit: See Position
Underlying Futures Contract: The specific futures
contract that is bought or sold by exercising an option.
U.S. Treasury Bill: A short-term U.S. government debt
instrument with an original maturity of one year or less. Bills are sold
at a discount from par with the interest earned being the difference
between the face value received at maturity and the price paid.
U.S. Treasury Bond: Government-debt security with a
coupon and original maturity of more than 10 years. Interest is paid
U.S. Treasury Note: Government-debt security with a
coupon and original maturity of one to 10 years.
Variable Limit: According to the Chicago Board of
Trade rules, an expanded allowable price range set during volatile
Variation Margin: During periods of great market
volatility or in the case of high-risk accounts, additional margin
deposited by a clearing member firm to an exchange 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
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 credit-worthiness 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.