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Glossary

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A

Abandon: The act of an option holder in electing not to exercise or offset an option.

Accommodation Trading: Non-competitive trading entered into by a trader, usually to assist another with illegal trades.

Actuals: The physical or cash commodity, as distinguished from a commodity futures contract. The goods or financial instruments underlying a futures contract. Also see Cash and Spot Commodity.

Aggregation: The principle under which all futures positions owned or controlled by one trader (or group of traders acting in concert) are combined to determine reporting status and compliance with speculative limits.

Allowances: The discounts (premiums) allowed for grades or locations of a commodity lower (higher) than the par (or basis) grade or location specified in the futures contract. See Differentials.

Approved Delivery Facility: Any bank, stockyard, mill, storehouse, plant, elevator or other depository that is authorized by an exchange for the delivery of commodities tendered on futures contracts.

Arbitrage: Simultaneous purchase of cash commodities or futures in one market against the sale of cash commodities or futures in the same or a different market to profit from a discrepancy in prices. The two transactions may take place between two different exchanges, in different delivery months, or between the cash and futures markets. Also includes some aspects of hedging. See Spread, Switch.

Asian Option: An option whose payoff depends on the average price of the underlying asset during some portion of the life of the option.

Assignable Contract: One which allows the holder to convey his rights to a third party. Exchange-traded contracts are not assignable.

Associated Person: A person associated with any futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, or leverage transaction merchant as a partner, officer, employee, consultant, or agent. Also, any person occupying a similar status or performing similar functions, in any capacity that involves: (a) the solicitation or acceptance of customers' orders, discretionary accounts, or participation in a commodity pool (other than in a clerical capacity); or (b) the supervision of any person or persons so engaged.

At-the-Market: An order to buy or sell a futures contract at whatever price is obtainable when the order reaches the trading floor or computer at an electronic exchange. Also called a Market Order.

At-the-Money: When an option's exercise price is the same as the current trading price of the underlying futures, the option is at-the-money.

Audit Trail: The record of trading information identifying, for example, the brokers participating in each transaction, the firms clearing the trade, the terms and time of the trade, and, ultimately, and when applicable, the customers involved.

B

Back Months: Those futures delivery months with expiration or delivery dates furthest into the future; futures delivery months other than the spot or nearby delivery month.

Backpricing: Fixing the price of a commodity for which the commitment to purchase has been made in advance. The buyer can fix the price relative to any monthly or periodic delivery using the futures markets.

Backwardation: Market situation in which futures prices are progressively lower in the distant delivery months. For instance, if the gold quotation for February is $160.00 per ounce and that for June is $155.00 per ounce, the backwardation for four months against January is $5.00 per ounce. (Backwardation is the opposite of contango). See Inverted Market.

Banker's Acceptance: A draft or bill of exchange accepted by a bank where the accepting institution guarantees payment. Used extensively in foreign trade transactions.

Basis:The difference between the spot or cash price of a commodity and the price of the nearest futures contract for the same or a related commodity. Basis is usually computed in relation to the futures contract next to expire and may reflect different time periods, product forms, qualities, or locations. CASH – FUTURES = BASIS.

Basis Grade: The grade of a commodity used as the standard or par grade of a futures contract.

Basis Point: The measurement of a change in the yield of a debt security. One basis point equals 1/100 of one percent.

Basis Quote: Offer or sale of a cash commodity in terms of the difference above or below a futures price (e.g., 10 cents over December corn).

Basis Risk: The risk associated with an unexpected widening or narrowing of basis between the time a hedge position is established and the time that it is lifted.

Bear: One who expects a decline in prices. The opposite of a "bull." A news item is considered bearish if it is expected to result in lower prices.

Bear Market: A market in which prices are declining.

Bear Spread: The simultaneous purchase and sale of two futures contracts in the same or related commodities with the intention of profiting from a decline in prices but at the same time limiting the potential loss if this expectation does not materialize. In agricultural products, this is accomplished by selling a nearby delivery and buying a deferred delivery.

Bear Vertical Spread: A strategy employed when an investor expects a decline in a futures price but at the same time seeks to limit the potential loss if this expectation is not realized. This spread requires the simultaneous purchase and sale of options of the same class and expiration date but different strike prices. For example, if call options are spread, the purchased option must have a higher exercise price than option that is sold.

Beta (Beta Coefficient): A measure of the variability of rate of return or value of a stock or portfolio compared to that of the overall market. Also, a measure correlating stock price movement to the movement of an index. Beta is used to determine the number of contracts required to hedge with stock index futures or options on futures.

Bid: An offer to buy a specific quantity of futures contracts at a stated price.

Blackboard Trading: The practice of selling commodities from a blackboard on a wall of a futures exchange.

Black-Scholes Model: An option pricing formula initially developed by F. Black and M. Scholes for securities options and later refined by Black for options on futures.

Board Broker System: A system of trading in which an individual member of an exchange (or a nominee of the member) is designated as a Board Broker for a particular futures with the responsibility of executing orders left with him by other members on the floor, providing price quotations, and maintaining orderliness in the trading crowd. A Board Broker may not trade for his own account or the account of an affiliated organization. Also See Free Crowd Systems and Specialist System.

Board Order: See Market-if-Touched Order.

Board of Trade: Any exchange or association, whether incorporated or unincorporated, of persons who are engaged in the business of buying or selling any futures or commodity, or receiving the same for sale on consignment.

Boiler Room: An enterprise which often is operated out of inexpensive, low-rent quarters (hence the term "boiler room") that uses high pressure sales tactics (generally over the telephone) and possibly false or misleading information to solicit generally unsophisticated investors.

Book: The collection of unfilled orders residing on a computer at an electronic trading exchange.

Booking the Basis: A forward pricing sales arrangement in which the cash price is determined either by the buyer or seller within a specified time. At that time, the previously-agreed basis is applied to the then-current futures quotation.

Book Transfer: A series of accounting or bookkeeping entries used to settle a series of cash market transactions.

Box Transaction: An option position in which the holder establishes a long call and a short put at one strike price and a short call and a long put at another strike price, all of which are in the same contract month in the same futures.

Break: A rapid and sharp price decline.

Broker: A person paid a fee or commission for executing buy or sell orders for a customer. In futures trading, the term may refer to: (1) Floor Broker--a person who actually executes orders on the trading floor of an exchange; (2) Account Executive, Associated Person, registered Commodity Representative or Customer's Man--the person who deals with customers in the offices of futures commission merchants; or (3) the Futures Commission Merchant.

Broker Association: Two or more exchange members who (1) share responsibility for executing customer orders; (2) have access to each other's unfilled customer orders as a result of common employment or other types of relationships; or (3) share profits or losses associated with their brokerage or trading activity.

Bucketing: Directly or indirectly taking the opposite side of a customer's order into a broker's own account or into an account in which a broker has an interest, without open and competitive execution of the order on an exchange.

Bucket Shop: A brokerage enterprise which "books" (i.e., takes the opposite side of) a customer's order without actually having it executed on an exchange.

Bulge: A rapid advance in prices.

Bull: One who expects a rise in prices. The opposite of "bear." A news item is considered bullish if it portends higher prices.

Bullion: Bars or ingots of precious metals, usually cast in standardized sizes.

Bull Market: A market in which prices are rising.

Bull Spread: The simultaneous purchase and sale of two futures contracts in the same or related commodities with the intention of profiting from a rise in prices but at the same time limiting the potential loss if this expectation is wrong. In agricultural commodities, this is accomplished by buying the nearby delivery and selling the deferred. One type of bull spread, the limited risk spread, is placed only when the market is near full carrying charges. See Limited Risk Spread.

Bull Vertical Spread: A strategy used when an investor expects that the price of a futures will go up but at the same time seeks to limit the potential loss should this judgment be in error. This strategy involves the simultaneous purchase and sale of options of the same class and expiration date but different strike prices. For example, if call options are spread, the purchased option must have a lower exercise or strike price than the sold option.

Buoyant: A market in which prices have a tendency to rise easily with a considerable show of strength.

Butterfly Spread: A three-legged spread in futures or options. In the option spread, the options have the same expiration date but differ in strike prices. For example, a butterfly spread in soybean call options might consist of two short calls at a $6.00 strike price, one long call at a $6.50 strike price, and one long call at a $5.50 strike price.

Buyer: A market participant who takes a long futures position or buys an option. An option buyer is also called a taker, holder, or owner.

Buyer's Call: See Call.

Buyer's Market: A condition of the market in which there is an abundance of goods available and hence buyers can afford to be selective and may be able to buy at less than the price that previously prevailed. See Seller's Market.

Buying Hedge (or Long Hedge): Hedging transaction in which futures contracts are bought to protect against possible increases in the cost of commodities. See Hedging.

Buy (or Sell) On Close: To buy (or sell) at the end of the trading session within the closing price range.

Buy (or Sell) On Opening: To buy (or sell) at the beginning of a trading session within the open price range.

C

C & F: "Cost and Freight" paid to a point of destination and included in the price quoted. Same as C.A.F.

Call: (1) A period at the opening and the close of some futures markets in which the price for each futures contract is established by auction; (2) Buyer's Call generally applies to cotton, also called "call sale." A purchase of a specified quantity of a specific grade of a commodity at a fixed number of points above or below a specified delivery month futures price with the buyer allowed a period of time to fix the price either by purchasing a futures for the account of the seller or telling the seller when he wishes to fix the price; (3) Seller's Call, also called "call purchase," is the same as the buyer's call except that the seller has the right to determine the time to fix the price; (4) option contract giving the buyer the right but not the obligation to purchase the underlying or to enter into a long futures position; and (5) the requirement that a financial instrument be returned to the issuer prior to maturity, with principal and accrued interest paid off upon return.

Call Cotton: Cotton bought or sold on call. See Call.

Called: Another term for "exercised" when the option is a call. The writer of a call must deliver the indicated underlying when the option is exercised or called.

Call Option: A contract that entitles the buyer/taker to buy a fixed quantity of the underlying commodity or financial instrument at a stipulated basis or striking price at any time up to the expiration of the option. The buyer pays a premium to the seller/grantor for this contract. A call option is bought with the expectation of a rise in prices. See Put Option.

Call Rule: An exchange regulation under which an official bid price for a cash commodity is competitively established at the close of each day's trading. It holds until the next opening of the exchange.

Capping: Effecting commodity or security transactions shortly prior to an option's expiration date depressing or preventing a rise in the price of the commodity or security so that previously written call options will expire worthless and the premium the writer received will be protected.

Carrying Broker: A member of a futures exchange, usually a futures commission merchant, through whom another broker or customer elects to clear all or part of its trades.

Carrying Charges: Cost of storing a physical commodity or holding a financial instrument over a period of time. Includes insurance, storage, and interest on the invested funds as well as other incidental costs. It is a carrying charge market when there are higher futures prices for each successive contract maturity. If the carrying charge is adequate to reimburse the holder, it is called a "full charge." Carrying costs usually are reflected in the difference between the futures prices for different delivery months. Also see Negative Carry, Positive Carry and Contango.

Cash Commodity: The physical or actual commodity as distinguished from the futures contract which calls for the delivery of the “cash commodity” during the delivery period. Sometimes called Spot Commodity or Actuals.

Cash Forward Sale: See Forward Contracting.

Cash Market: The market for the cash commodity (as contrasted to a futures contract), taking the form of: (1) an organized, self-regulated central market (e.g., a futures exchange); (2) a decentralized over-the-counter market; or (3) a local organization, such as a grain elevator or meat processor, which provides a market for a small region.

Cash Price: The price in the marketplace for actual cash or spot commodities to be delivered via customary market channels.

Cash Settlement: A method of settling certain futures or option contracts whereby the seller (or short) pays the buyer (or long) the cash value of the underlying vehicle traded according to a procedure specified in the contract.

CCC: See Commodity Credit Corporation.

CD: See Certificate of Deposit.

CEA: See Commodity Exchange Authority.

Certificate of Deposit (CD): A time deposit with a specific maturity evidenced by a certificate. Large-denomination CDS are typically negotiable.

CFTC: See Commodity Futures Trading Commission.

CFO: Cancel Former Order.

Certificated or Certified Stocks: Stocks of a commodity that have been inspected and found to be of a quality deliverable against futures contracts, stored at the delivery points designated as regular or acceptable for delivery by a commodity exchange. In grain, called "stocks in deliverable position." See Deliverable Stocks.

Changer: A clearing member of both the Mid-America Commodity Exchange (MCE) and another futures exchange who, for a fee, will assume the opposite side of a transaction on the MCE by taking a spread position between the MCE and another futures exchange which trades an identical, but larger, contract. Through this service, the changer provides liquidity for the MCE and an economical mechanism for arbitrage between the two markets.

Charting: The use of graphs and charts in the technical analysis of futures markets to plot trends of price movements, average movements of price, volume of trading and open interest. See Technical Analysis.

Chartist: Technical trader who reacts to signals derived from graphs of price movements.

Cheapest-to-Deliver: Usually refers to the selection of bonds deliverable against an expiring bond futures contract.

Chooser Option: An option which is transacted in the present but which at some prespecified future date is chosen to be either a put or a call option.

Churning: Excessive trading of an account by a broker with control of the account for the purpose of generating commissions while disregarding the interests of the customer.

Circuit Breakers: A system of trading halts and price limits on equities and derivative markets designed to provide a cooling-off period during large, intraday market movements. The first known use of the term circuit breaker in this context was in the Report of the Presidential Task Force on Market Mechanisms (January 1988), which recommended that circuit breakers be adopted following the market break of October 1987.

C.I.F.: Cost, insurance and freight paid to a point of destination and included in the price quoted.

Class (of options): Options of the same type (i.e., either puts or calls, but not both) covering the same underlying futures contract or physical commodity (e.g., a March call with a strike price of 62 and a May call with a strike price of 58).

Clearing: The procedure through which the clearing house or association becomes the buyer to each seller of a futures contract, and the seller to each buyer, and assumes responsibility for protecting buyers and sellers from financial loss by assuring performance on each contract.

Clearing House or Clearinghouse: An adjunct to, or division of, a commodity exchange through which transactions executed electronically or on the floor of the exchange are settled. Also charged with assuring the proper conduct of the exchange's delivery procedures and the adequate financing of the trading. Also, an agency associated with an exchange which guarantees all trades, thus assuring contract delivery, or financial settlement as the case may be. The clearinghouse becomes the buyer for every seller and the seller for every buyer.

Clearing Member: A member of the Clearing House or Association. All trades of a non-clearing member must be registered and eventually settled through a clearing member.

Clearing Price: See Settlement Price.

Close, The: The period at the end of the trading session, officially designated by the exchange, during which all transactions are considered made "at the close." Also see Call.

Closing-Out: Liquidating an existing long or short futures or option position with an equal and opposite transaction. Also known as Offset.

Closing Price (or Range): The price (or price range) recorded during trading that takes place in the final moments of a day's activity that is officially designated as the "close."

Combination: Puts and calls held either long or short with different strike prices and expirations.

Commercial: An entity involved in the production, processing, or merchandising of a commodity or financial instrument.

Commercial Grain Stocks: Domestic grain in store in public and private elevators at important markets and grain afloat in vessels or barges in lake and seaboard ports.

Commercial Paper: Short-term promissory notes issued in bearer form by large corporations, with maturities ranging from 5 to 270 days. Since the notes are unsecured, the commercial papers market generally is dominated by large corporations with impeccable credit ratings.

Commission: (1) The charge made by a commission house for buying and selling commodities; (2) The fee that brokers charge their clients; (3) the CFTC.

Commitments: See Open Interest.

Commodity: A good or item of trade or commerce. Goods tradable on an exchange, such as corn, gold, or hogs, as distinguished from instruments or other intangibles like T-Bills or stock indexes.

Commodity Credit Corporation: A government-owned corporation established in 1933 to assist American agriculture. Major operations include price support programs, foreign sales, and export credit programs for agricultural commodities.

Commodity Exchange Authority: A regulatory agency of the U.S. Department of Agriculture established to administer the Commodity Exchange Act prior to 1975; the predecessor of the Commodity Futures Trading Commission.

Commodity Exchange Commission: A commission consisting of the Secretary of Agriculture, Secretary of Commerce, and the Attorney General, responsible for administering the Commodity Exchange Act prior to 1975.

Commodity Futures Trading Commission (CFTC): The Federal regulatory agency established by the CFTC Act of 1974 to administer the Commodity Exchange Act. The CFTC has exclusive jurisdiction over all futures trading, futures exchanges, futures commission merchants and their agents, floor brokers, and traders.

Commodity-Linked Bond: A bond in which payment to the investor is dependent on the price level of such commodities as crude oil, gold, or silver at maturity.

Commodity Option: See Option, Puts and Calls.

Commodity Pool: An investment trust, syndicate or similar form of enterprise operated for the purpose of trading futures or option contracts.

Commodity Pool Operator (CPO): Individuals or firms in businesses similar to investment trusts or syndicates that solicit or accept funds, securities or property for the purpose of trading futures contracts or futures options.

Commodity Price Index: Index or average, which may be weighted, of selected commodity prices, intended to be representative of the markets in general or a specific subset of commodities (for example, grains or livestock).

Commodity Product Spread: The simultaneous purchase (or sale) of a commodity and the sale (or purchase) of the products of that commodity. An example would be buying soybeans and selling soybean oil and meal (see Crush). Another example would be the purchasing crude oil and selling unleaded gasoline and heating oil (see Crack).

Commodity Trading Advisor (CTA): Individuals or firms that, for pay, issue analyses or reports concerning commodities, including the advisability of trading in futures or options.

Congestion: (1) A market situation in which shorts attempting to cover their positions are unable to find an adequate supply of contracts provided by longs willing to liquidate or by new sellers willing to enter the market, except at sharply higher prices; (2) in technical analysis, a period of time characterized by repetitious and limited price fluctuations.

Consignment: A shipment made by a producer or dealer to an agent elsewhere with the understanding that the commodities in question will be cared for or sold at the highest obtainable price. Title to the merchandise shipped on consignment rests with the shipper until the goods are disposed of according to agreement.

Contango: Market situation in which prices in succeeding delivery months are progressively higher than in the nearest delivery month; the opposite of "backwardation."

Contract: (1) A term of reference describing a unit of trading for a futures or option; (2) A legally enforceable agreement between two or more parties to buy or sell a specified commodity, detailing the amount and grade of the product and the date on which the contract will mature and become deliverable.

Contract Grades: Those grades of a commodity which have been officially approved by an exchange as deliverable in settlement of a futures contract.

Contract Market: (1) A board of trade or exchange designated by the Commodity Futures Trading Commission to trade futures or options under the Commodity Exchange Act; (2) Sometimes the futures contract itself (e.g., corn is a contract market).

Contract Month: See Delivery Month.

Contract Unit: The actual amount of a futures represented in a contract.

Contrarian Theory: A theory suggesting that the general consensus about trends is wrong. The contrarian takes an opposite position from the majority opinion to capitalize on overbought or oversold situations.

Controlled Account: Any account for which trading is directed by someone other than the owner. Also called a Managed Account or a Discretionary Account.

Convergence: The tendency for prices of physicals and futures to approach one another, usually during the delivery month. Also called a "narrowing of the basis."

Conversion: When trading options on futures contracts, a position created by selling a call option, buying a put option, and buying the underlying futures contract, where the options have the same strike price and the same expiration. Also, for an investor who is long the physical and short synthetic futures, conversion is the sale of a cash position and investment of part of the proceeds in the margin for a long futures position. The remaining money is placed in an interest-bearing instrument. This practice allows the investor/dealer to receive high rates of interest and take delivery of the underlying if needed.

Conversion Factor: A figure published by the CBOT used to adjust a T-Bond hedge for the difference in maturity between the T-Bond contract specifications and the T-Bonds being hedged.

Corner: (1) Securing such relative control of a commodity or security that its price can be manipulated; (2) In the extreme situation, obtaining contracts requiring the delivery of more commodities or securities than are available for delivery.

Corn-Hog Ratio: See Feed Ratio.

Cost of Tender: Total of various charges incurred when a commodity is certified and delivered on a futures contract.

Counter-Trend Trading: In technical analysis, the method by which a trader takes a position contrary to the current market direction in anticipation of a change in that direction.

Coupon (Coupon Rate): A fixed dollar amount of interest payable per annum, stated as a percentage of principal value, usually payable in semiannual installments.

Cover: (1) Purchasing futures to offset a short position. Same as Short Covering. See Offset, Liquidation; (2) To have in hand the physical commodity or instrument when a short futures or leverage sale is made, or to acquire the commodity or instrument that might be deliverable on a short sale.

Covered Option: A short call or put option position which is covered by the sale or purchase of the underlying futures contract or physical commodity. For example, in the case of options on futures contracts, a covered call is a short call position combined with a long futures position. A covered put is a short put position combined with a short futures position.

Covered Position: A transaction which has been offset with an opposite and equal transaction for example, if a gold futures contract had been purchased and later a call option for the same commodity amount and delivery date was sold, the trader’s option position is “covered.” He holds the futures contract deliverable on the option if it is exercised. Also used to indicate the repurchase of previously sold contracts as in “he covered his short position."

Cox-Ross-Rubinstein Option Pricing Model: An option pricing logarithm developed by J. Cox, S. Ross and M. Rubinstein which can be adopted to include effects not included in the Black-Scholes model (e.g., early exercise and price supports).

CPO: See Commodity Pool Operator.

Crack or Crack Spread: In energy futures, the simultaneous purchase of crude oil futures and the sale of petroleum product futures to establish a refining margin. See Gross Processing Margin.

Crop Year: The time period from one harvest to the next, varying according to the commodity (i.e., July 1 to June 30 for wheat; September 1 to August 31 for soybeans).

Cross-Hedge: Hedging a cash market position in a futures contract for a different but price-related instrument.

Cross-Margining: A procedure for margining related securities, options, and futures contracts jointly when different clearing houses clear each side of the position.

Cross-Rate: In foreign exchange, the price of one currency in terms of another currency in the market of a third country. For example, a London dollar cross-rate could be the price of one U.S. dollar in terms of deutsche marks on the London market.
Cross Trading: Offsetting or noncompetitive match of the buy order of one customer against the sell order of another, a practice that is permissible only when executed in accordance with the Commodity Exchange Act, CFTC regulations, and rules of the contract market.

Crush or Crush Spread: In the soybean futures market, the simultaneous purchase of soybean futures and the sale of soybean meal and soybean oil futures to establish a processing margin. See Gross Processing Margin.

CTA: See Commodity Trading Advisor.

CTI Codes: Customer Type Indicator codes. These consist of four identifiers which describe transactions by the type of customer for which a trade is effected.. The four codes are: (1) trading for the member's own account; (2) trading for a proprietary account of the clearing member's firm; (3) trading for another member who is currently present on the trading floor or for an account controlled by such other member; and (4) trading for any other type of customer. Transaction data classified by the above codes are included in the trade register report produced by a clearing organization.

Curb Trading: Trading by telephone or by other means that takes place after the official market has closed. Originally it took place in the street on the curb outside the market. Under CFTC rules, curb trading is illegal. Also known as kerb trading.

Current Delivery Month: The futures contract which matures and becomes deliverable during the present month. Also called Spot Month.

Cyberspace: The electronic bits and bytes on a computer that comprise data which are a stored recording of information on a computer. Electronic exchanges, enable entering, tracking and fulfillment of orders via computer.