• Jesus talked about money more than He did about Heaven and Hell combined.
• Jesus talked about money more than anything else except the Kingdom of God.
• 11 of 39 parables talk about money.
• 1 of every 7 verses in the Gospel of Luke talks about money.

 

 

What You Need to Know About Forex!

by Marco Mayer, Trading Educators' leading Forex expert

 

Many people are trying to trade Forex, but are finding themselves in trouble because they do not fully understand how that market works. 

At Trading Educators, we teach people how to trade Forex correctly rather than letting them commit financial suicide.

There are good reasons to trade Forex, but there are also many disadvantages, especially compared with trading currency futures.  Listed below are some of the primary advantages that you should know about.  If the U.S. dollar is involved, and you are able to trade during the 22-hours the U.S. futures trade on Globex, we feel you might be safer trading currencies in the currency futures markets which are traded on a regulated exchange.

Throughout this document, the word "dealer" refers to Forex brokers.

 

Currency Futures

You can trade full-size currency futures ($125,000) contracts, and mini-size Forex Futures contracts at the Chicago Mercantile Exchange.  (At this time we do not recommend trading mini-size Forex Futures because they are not sufficiently liquid.)  Here are the advantages:

• You are trading at a regulated exchange, not with an unregulated broker or bank.
• The regulations for futures are far more extensive than you can find with a Forex dealer, even if that dealer is registered with the CFTC and the NFA.
• In futures, your account is better protected against broker or bank failure, especially when you're in a position and not in cash.
• In futures there is 100% transparency: everyone sees the same price at the same time. This is not true when trading Forex.
• There is no requirement for interest to be received or paid when a contract is held overnight.
• Futures commissions are low and are negotiable, and the spread in any liquid contract is almost always 1-tick.
• The exchange is the buyer and seller of last resort; you don't trade against your broker. 

 

Forex

There are also some advantages trading in the spot forex markets, especially when trading using electronic communications networks (ECN), with which you trade directly with other market participants and not against your broker:

• You can trade smaller size. With many brokers you can trade 10k mini-lots, which allows you to do better position-sizing and risk-management, especially when you're trading a small account and/or position trading.
• Usually the good ECN networks provide more liquidity than the futures markets, but for most traders this will probably never be an issue in the futures.
• You can collect interest while you're in a position, which can be quite interesting if you're holding longer-term positions.

Be careful to avoid Forex scams.  If you prefer to trade currency pairs in the Forex Markets, be mindful of the following cautions:

When you open a Forex account, choose a reputable firm or you could lose your trading account. That's right, you could lose every cent!  Such loss has already happened when Forex brokers have "gone broke," so it's up to you to choose a good broker.

Ever since retail Forex began, we have warned that it is essential that you work with reputable Forex brokers from a country that demands high industry standards for Forex firms.

The U.S. has tight industry standards and the strictest regulation for Forex firms, as do Canada, U.K., Australia, and Hong Kong.  If you have your account domiciled with any of these nations, you're already ahead of the game.  But beyond that, you also need to find a reputable and well-capitalized firm within your country of choice. 

Let us emphasize: place your hard-earned cash only with a firm that is highly regulated AND is well capitalized! These two points are extremely important. 

In fact, there is even one firm that displays its balance sheet directly on its website.  If a firm avoids strict regulations and/or exceed the minimum capital requirements of these regulators, then you don't want to do business with them.

 

How to Tell Which Firm Is Worth Your Business

You can find out which firms are exceeding industry standards by visiting the regulators' sites: www.nfa.futures.org and www.cftc.gov .

The CFTC and NFA can point you to a list that tells you exactly the amount of assets a firm has, and the minimum requirements each firm has to meet.

Don't get involved with a small firm or an unregulated or loosely regulated firm. As said before, regulators in the U.S., U.K., Canada, Australia, and Hong Kong are tough. If your firm dodges these places, there's a reason.

If your firm welcomes regulation, and strives to exceed minimum capital requirements that the NFA and CFTC set forth, then you are probably with a firm that's worth your time.

 

Additional Deceptions

Forex brokers can deceive you about there being no commissions. But there's a spread you have to pay, and if it's 3-pips and you trade 100k units, this means you pay $20 commissions per round turn, which will eat up your capital at an astonishing rate. Even winning traders lose money and end up with negative results because of this outlandish overhead.

• Guaranteed fills. True, but the only way a dealer can guarantee fills is for the dealer to become the buyer or seller of last resort. That means the dealer is running a bucket shop, and you're trading against the broker.
• Brokers do not all tell the truth about volume. They tell you about the volume for all Forex trading, which doesn't even come close to the volume they truly have at their own brokerage, where you are trading. Volume in currency futures is higher than the volume traded at any single Forex broker, often greater by a factor of ten.
• Leaning. Brokers say they are charging you a 3-pip spread to trade the popular currency pairs. But in reality, a broker may be making even more by skewing prices. Since you are not trading at an exchange, the broker can basically feed you any price he wants to feed you. Broker pricing does not guarantee you true price discovery, nor does it guarantee an efficient market. A broker might, for example, widen the spreads from 3- to 6-ticks for a few seconds, hitting your stop-loss, while the real market never traded there.
• Maybe you have heard that if you win regularly in Forex, you may be barred from trading. Is this true? Yes it is, with some of the bad brokers. The fact that it is true is just another proof that when you trade Forex, you are trading at a bucket shop. In the book, "Reminiscences of a Stock Operator," we are told that Jesse Livermore was banned from trading at certain stock brokers because they couldn't stand his beating the house. The same thing is true with many Forex brokers. Since they are the ones guaranteeing you a fill, they are in effect the buyer and seller of last resort. The truth is that most Forex brokers have precious little liquidity at their firms. In order to give you the impression that there is liquidity, it is the dealer who gives you your fill. It is the dealer who does the stop running that supposedly doesn't exist in Forex. But if you are regularly beating the socks off the dealer, he will ban you from trading at his firm. This can happen even when the dealer claims to not have a deal desk.

Is there hope for a trader who wants to trade Forex? Yes, there is.

If you have a need to trade any of the exotics, it is not practical, and may very well be impossible, to trade them in the futures markets. Also, if you insist on trading Forex with a small amount of money, you will have to trade in the Forex markets. We refer to mini-, micro-, and nano-accounts.

Having given you the real information about Forex, we want to make sure that you understand that Trading Educators is here to help you to properly trade Forex, if that turns out to be your decision. Towards that end, we offer a highly successful Forex trading method (Ambush), an EBook on how to day trade Forex, a Forex webinar, and private tutoring in Forex trading.

 

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.

Accrual: The apportionment of premiums and discounts on forward exchange transactions that relate directly to deposit swap (Interest Arbitrage) deals , over the period of each deal.

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.

Adjustable Peg: Term for an exchange rate regime where a country's exchange rate is "pegged" (i.e. fixed) in relation to another currency , often the dollar or French Franc, but where the rate may be changed from time to time. This was the basis of the Bretton Woods system. See pegged, and crawling peg.

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.

Adjustment: Official action normally by either change in the internal economic policies to correct a payment imbalance or in the official currency rate or. Adjustment - Official action normally by either change in the internal economic policies to correct a payment imbalance or in the official currency rate or.

ADP - Acronym for "Alternate Delivery Procedure," a contract delivery method permitting the buyer and the seller, by agreement, to settle their delivery commitment independently of the exchange.

Agent Bank: (1) A bank acting for a foreign bank. (2) In the Euro market - the agent bank is the one appointed by the other banks in the syndicate to handle the administration of the loan.

Aggregate Demand: Total demand for goods and services in the economy. It includes private and public sector demand for goods and services within the country and the demand of consumers and and firms in other countries for good and services.

Aggregate risk: Size of exposure of a bank to a single customer for both forex spot and forward contracts.

Aggregate Supply: Total supply of goods and services in the economy from domestic sources (including imports) available to meet aggregate demand.

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.

Aggressor: A trader dealing on an existing price in the market.

Agio: Difference in the value between currencies. Also used to describe percentage charges for conversion from paper money into cash, or from a weak into a strong currency.

All or None: A limit price order that instructs the broker to fill the whole order at the stated price or not at all.

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.

American Option: An option that can be exercised anytime during its life. The majority of exchange-traded options are American.

Anonymous Trading: Visible bids and offers on the forex market without the identity of the bidder and seller being revealed. Anonymous trades allow the high profile traders to execute transactions without the scrutiny and speculation of the market.

Appreciation: A currency is said to 'appreciate' when it strengthens in price in response to market demand.

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.

Around: Used in quoting forward "premium / discount". "Five-five around" would mean five point on either side of the present spot value.

Ascending Triangles: A bullish continuation pattern that is shaped like a right triangle consisting of two or more equal highs forming a horizontal line at the top.

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

Ask: Also called "offer". Indicates a willingness to sell a futures contract at a given price.

Asset: An item having commercial or exchange value.

Asset Allocation: Investment practice that divides funds among different markets to achieve diversification for risk management purposes and/or expected returns consistent with an investor’s objectives.

Asset Swap: An interest rate swap used to alter the cash flow characteristics of an institution's assets in order to provide a better match with its liabilities.

Assign: To make an option seller perform his obligation to assume a
short futures position (as the seller of a call option) or a long
futures position (as a seller of a put 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.

Associate Membership: A Chicago Board of Trade membership that allows an individual to trade financial instrument futures and other designated markets.

At Best: An instruction given to a dealer to buy or sell at the best rate that can be obtained.

At or Better: An order to deal at a specific rate or better.

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.

Authorized Dealer: A financial institution or bank authorized to deal in foreign exchange.

 

 

 

 

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.

Back Office: The office location, or department, where the processing of financial transactions takes place.

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.

Back Testing: The process of designing a trading strategy based on historical data. It is then applied to fresh data to see if and how well the strategy works. Most technical analysis is tested with this approach.

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.

Balance: Amount of money in a forex account.

Balance of Payments: A record of value of all the economic transactions between residents, business firms, governments and any other institutions in a country and the rest of the world.

Balance of Trade: The value of a country's exports minus its imports.

Band: The range in which a currency is permitted to move. A system used in the ERM.

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.

Bank for International Settlements (BIS): An international organization fostering the cooperation of central banks and international financial institutions. Essentially, the BIS, located in Basel, Switzerland, is a central bank for central banks. It monitors and collects data on international banking activity and promulgates rules concerning international bank regulation.

Bank line: Line of credit granted by a bank to a customer, also known as a " line".

Bank Rate: The rate at which a central bank is prepared to lend money to its domestic banking system.

Bar Chart: A type of chart which consists of four significant points: the high and the low prices, which form the vertical bar, the opening price, which is marked with a little horizontal line to the left of the bar, and the closing price, which is marked with a little horizontal line of the right of the bar.

Base Currency: The first currency in a Currency Pair. It shows how much the base currency is worth as measured against the second currency. For example, if the USD/CHF rate equals 1.6215 then one USD is worth CHF 1.6215 In the FX markets, the US Dollar is normally considered the 'base' currency for quotes, meaning that quotes are expressed as a unit of $1 USD per the other currency quoted in the pair. The primary exceptions to this rule are the British Pound, the Euro and the Australian Dollar.

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.

Basis trading: Taking opposite positions in the cash and futures market with the intention of profiting from favorable movements in the basis.

Basket: A group of currencies normally used to manage the exchange rate of a currency. Sometimes referred to as a unit of account.

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.

Bid Price: The bid is the price at which the market is prepared to buy a specific Currency in a Foreign Exchange Contract or Cross Currency Contract. At this price, the trader can sell the base currency. It is shown on the left side of the quotation. For example, in the quote USD/CHF 1.4527/32, the bid price is 1.4527; meaning you can sell one US dollar for 1.4527 Swiss francs.

Bid/Ask Spread: The difference between the bid and offer price.

Big Figure: The first two or three digits of a foreign exchange price or rate. Examples: If the USD/JPY bid/ask is 115.27/32, the big figure is 115. On a EUR/USD price of 1.2855/58 the big figure is 1.28. The big figure is often omitted in dealer quotes. The EUR/USD price of 1.2855/58 would be verbally quoted as "55/58".

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.

Bollinger Bands: The basic interpretation of Bollinger Bands is that prices tend to stay within the upper and lower bands. The distinctive characteristic of Bollinger Bands is that the spacing between the bands varies based on the volatility of the prices. During periods of extreme price changes (i.e., high volatility), the bands widen to become more forgiving. During periods of low volatility, the bands narrow to contain foreign exchange prices. The bands are plotted two standard deviations above and below a simple moving average. They indicate a "sell" when above the moving average (or close to the upper band) and a "buy" when below it (or close to the lower band). The bands are used by some FX traders in conjunction with other analyses, including RSI, MACD, CCI, and Rate of Change.

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

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).

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.

Break-Even Point: The price (or prices) at which a particular option or straddle will cover premium and transaction costs.

Bretton Woods Agreement of 1944: An agreement that established fixed foreign exchange rates for major currencies, provided for central bank intervention in the currency markets, and pegged the price of gold at US $35 per ounce. The agreement lasted until 1971, when President Nixon overturned the Bretton Woods agreement and established a floating exchange rate for the major currencies.

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.

Bundesbank: Germany's Central Bank.

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.

Buy In: To cover or close out a short position. See Offset.

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.

Buying Rate - Rate at which the market and a market maker in particular is willing to buy the currency. Sometimes called bid rate.

Buy Limit Order: An order to execute a transaction at a specified price (the limit) or lower.

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

Buy On Margin: The process of buying a currency pair where a client pays cash for part of the overall value of the position. The word margin refers to the portion the investor puts up rather than the portion that is borrowed.

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

 

 

 

C

Cable: Trader jargon referring to the Sterling/US Dollar exchange rate. So called because the rate was originally transmitted via a transatlantic cable beginning in the mid 1800's.

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.

Canceling Order: An order that deletes a customer's previous order.

Candlestick Chart: A chart that indicates the trading range for the day as well as the opening and closing price. If the open price is higher than the close price, the rectangle between the open and close price is shaded. If the close price is higher than the open price, that area of the chart is not shaded.

Capital Markets: Markets in which capital (stocks, bonds, etc.) is traded; Usually for medium or long term investing.

Capital Risk - The risk arising from a bank having to pay to the counter party with out knowing whether the other party will or is able to meet its side of the bargain. see Herstatt.

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.

Car: A loose, quantitative term sometimes used to describe a contract, e.g., "car of bellies." Derived from when quantities of the product specified on a contract often corresponded closely to the quantity carried in a railroad car.

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.

Carry (Interest-Rate Carry): The income or cost associated with keeping a foreign exchange position overnight. This is derived when the currency pairs in the position have different interest rates for the same period of time.

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.

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.

Carry Trade: An investment position of buying a higher yielding currency with the capital of a lower yielding currency to gain an interest rate differential.

Cash: Normally refers to an exchange transaction contracted for settlement on the day the deal is struck. This term is mainly used in the North American markets and those countries which rely for foreign exchange services on these markets because of time zone preference i.e. Latin America. In Europe and Asia, cash transactions are often referred to as value same day deals.

Cash and Carry: The buying of an asset today and selling a future contract on the asset. A reverse cash and carry is possible by selling an asset and buying a future.

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 Delivery: Same day settlement.

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.

Central Bank: A government or quasi-governmental organization that manages a country's monetary policy. For example, the US central bank is the Federal Reserve, and the German central bank is the Bundesbank.

Central Rate: Exchange rates against the ECU adopted for each currency within the EMS.Currencies have limited movement from the central rate according to the relevant band.

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.

Choppy: An erratic market, in general controlled by the locals, with no clear trend.

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).

Clean float: An exchange rate that is not materially effected by official intervention.

Cleared Funds: Funds that are freely available, sent in to settle a trade.

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 Margin: Financial safeguards to ensure that clearing members (usually companies or corporations) perform on the 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 CustomerMargin.

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.

Clerk : A member's employee who has been registered to work on the trading floor as a phone person or runner.

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.

Closed Position: Exposures in Foreign Currencies that no longer exist. The process to close a position is to sell or buy a certain amount of currency to offset an equal amount of the open position. This will 'square' the postion.

Closing Market Rate:The rate at which a position can be closed based on the market price at end of the day.

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.

Concurrent Indicators: See Lagging Indicators.

Confirmation: Written acknowledgment of a trade, listing important details such as the date, the size of the transaction, the price, the commission, and the amount of money involved.

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.

Consumer Price Index (CPI): A major inflation measure computed by the U.S. Department of Commerce. It measures the changes in prices of a fixed market basket of some 385 goods and services in the previous month.

Contagion: The tendency of an economic crisis to spread from one market to another. In 1997, political instability in Indonesia caused high volatility in their domestic currency, the Rupiah. From there, the contagion spread to other Asian emerging currencies, and then to Latin America, and is now referred to as the 'Asian Contagion'.

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

Continuation: Represents an extension of the trend. The trend continues to have momentum, and hence it moves onwards without reversal.

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 Account: A general ledger account representing the uncovered position in a particular currency. Such accounts are referred to as Position Accounts.

Conversion Arbitrage: A transaction where the asset is purchased and buys a put option and sells a call option on the asset purchased, each option having the same exercise price and expiry.

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.

Convertible Currency: A currency that can be freely exchanged for another currency (and or gold) without special authorization from the central bank.

Copey: Slang for the Danish krone.

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.

Correction: A move in price against the current established trend.

Correspondent Bank:The foreign banks representative who regularly performs services for a bank which has no branch in the relevant centre, e.g. to facilitate the transfer of funds. In the US this often occurs domestically due to inter state banking restrictions.

Cost of Carry: The cost associated with borrowing money in order to maintain a position. It is based on the interest parity, which determines the forward price.

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

Counterparty:A participant in a financial transaction.

Counter Currency: The second listed Currency in a Currency Pair.

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.

Countervalue: Where a person buys a currency against the dollar it is the dollar value of the transaction.

Country Risk: Risk associated with a cross-border transaction, including but not limited to legal and political conditions.

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 Arbitrage: Arbitrage between financial instruments denominated in different currencies, using forward cover to eliminate exchange risk.

Covered Margin: The interest rate margin between two instruments denominated in different currencies after taking account of the cost of forward cover.

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.

Crawling peg: A method of exchange rate adjustment; the rate is fixed/ pegged, but adjusted at certain intervals in line with certain economic or market indicators.

Credit Checking: Before making a large financial transaction, it imperative to check whether the counterparty has enough available credit to carryout/honor the transaction. Credit checking refers to the process of verifying that counterparty has enough credit. The check is initiated after the price has been determined.

Credit Netting: Arrangements that exist to maximize free credit and speed the dealing process by reducing the need to constantly recheck credit. Large banks and trading institutions may have agreements to net outstanding deals.

Credit Risk: The risk that a debtor will not repay; more specifically the risk that the counterparty does not have the currency promised to be delivered.

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 Currency Pairs: A pair of currencies that does not include the U.S. dollar. For example: EUR/JPY or GBP/CHF

Cross Deal: A foreign exchange deal entered into involving two currencies, neither of which is the base currency.

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.

Cup with Handle: Named after the resemblance the formation on the chart bears to a cup and handle, this pattern offers Explanation into where a bullish trend in the price of a currency can begin. Once the pattern begins to curve upward and reaches the cup line, the currency is believed to be bullish and set for a rise.

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.

Currency: Any form of money issued by a government or central bank and used as legal tender and a basis for trade.

Currency Pair: The two currencies in a foreign exchange transaction. The “EUR/USD” is an example of a currency pair.

Currency Risk: The risk that shifts in foreign exchange rates may undermine the dollar or any other foreign currency value of overseas investments.

Currency symbols
AUD - Australian Dollar
CAD - Canadian Dollar
EUR - Euro
JPY - Japanese Yen
GBP - British Pound
CHF - Swiss Franc

Current Account: The net balance of a country's international payment arising from exports and imports together with unilateral transfers such as aid and migrant remittances. It excludes capital flows.

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

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 fulfilling 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.

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.

 

 

 

D

Daily Price Limits: See Limit (Up or Down).

Day Order: An order that expires automatically at the end of each day's trading session. There may be a day order with time contingency. For example, an "off at a specific time" order is an order that remains in force until the specified time during the session is reached. At such time, the order is automatically canceled.

Day Traders: Traders, who take positions in the underlying and then offset them prior to the close of trading on the same trading day.

Day Trading: Establishing and offsetting the same market position within one day.

Deal date: The date on which a transaction is agreed upon.

Dealer: An individual or firm that buys and sells assets from their portfolio, acting as a principal or counterpart to a transaction.

Dealer Option: A put or call on a physical commodity or security, not originating on or subject to the rules of an exchange, in which the obligation for performance rests with the writer of the option. Dealer options are normally written by firms handling the underlying commodity or security and offered to public customers, although the reverse may also be true.

Deal Ticket: The primary method of recording the basic information relating to a transaction.

Deck: The orders for purchase or sale of futures and option contracts held by a floor broker.

Declaration Date: See Expiration Date.

Declaration (of Options): See Exercise.

Default: Failure to perform on a futures contract as required by exchange rules, such as failure to meet a margin call, or to make or take delivery.

Deferred Futures: The futures contracts that expire during the most distant months. Also called Back Months. See Forward Purchase or Forward Sale.

Deficit: A negative balance of trade or payments.

Deflator: Difference between real and nominal Gross National Product, which is equivalent to the overall inflation rate.

Deliverable Grades: See Contract Grades.

Deliverable Stocks: Stocks of commodities located in exchange approved storage, for which receipts may be used in making delivery on futures contracts. In the cotton trade, the term refers to cotton certified for delivery. Also see Certificated Stocks.

Delivery: The tender and receipt of the actual, security, or the cash value of the underlying, or of a delivery instrument covering the underlying (e.g., warehouse receipts or shipping certificates), used to settle a futures contract. See Notice of Delivery.

Delivery Commitment, Buyer's: The written notice given by the buyer of his intention to take delivery against a long futures position on delivery day.

Delivery Commitment, Seller's: The written notice given by the seller of his intention to make delivery against the short futures position on delivery day.

Delivery, Current: Deliveries being made during a present month. Sometimes current delivery is used as a synonym for nearby delivery.

Delivery Date: The date on which the underlying or instrument of delivery must be delivered to fulfill the terms of a contract.

Delivery Instrument: A document used to effect delivery on a futures contract, such as a warehouse receipt or shipping certificate.

Delivery Month: The specified month within which a futures contract matures and can be settled by delivery.

Delivery, Nearby: The nearest traded month. In plural form, one of the nearer trading months.

Delivery Notice: The written notice given by the seller of his intention to make delivery against an open short futures position on a particular date. This notice, delivered through the clearing house, is separate and distinct from the warehouse receipt or other instrument that will be used to transfer title.

Delivery Option: A provision of a futures contract which provides the short with flexibility in regard to timing, location, quantity, or quality in the delivery process.

Delivery Points: Those locations designated by commodity exchanges where stocks of a commodity represented by a futures contract may be delivered in fulfillment of the contract.

Delivery Price: The price fixed by the clearing house at which deliveries on futures are invoiced--generally the price at which the futures contract is settled when deliveries are made.

Delivery Risk: A term to describe when a counterparty will not be able to complete his side of the deal, although willing to do so.

Delta: The correlation factor between the fluctuation of the price of the underlying and the change in premium for the option on that underlying. Delta changes from moment to moment as the option premium changes. See Delta Value.

Delta Margining: An option margining system used by some exchanges for exchange members and/or floor traders which equates the changes in option premiums with the changes in the price of the underlying futures contract to determine risk factors on which to base the margin requirements.

Delta Value: The expected change in an option's price given a one-unit change in the price of the underlying futures contract, physical commodity, or equity shares.

Deposit: The initial outlay required by a broker of a client to open a futures position, returnable upon liquidation of that position.

Depository Receipt: See Vault Receipt.

Depreciation: A fall in the value of a currency due to market forces.

Derivative: A financial instrument, traded on or off an exchange, the price of which is directly dependent upon (i.e., "derived from") the value of one or more underlying securities, equity indices, debt instruments, commodities, other derivative instruments, or any agreed upon pricing index or arrangement (e.g., the movement over time of the Consumer Price Index or freight rates). Derivatives involve the trading of rights or obligations based on the underlying product, but do not directly transfer property. They are used to hedge risk or to exchange a floating rate of return for fixed rate of return.

Desk:Term referring to a group dealing with a specific currency or currencies.

Designated Self Regulatory Organization (DSRO): Self regulatory organizations (i.e., the commodity exchanges and the National Futures Association) must enforce minimum financial and reporting requirements for their members, among other responsibilities outlined in the CFTC's regulations. When a futures commission merchant (FCM) is a member of more than one SRO, the SROs may decide among themselves which of them will be responsible for assuming these regulatory duties and, upon approval of the plan by the Commission, be appointed the "designated self regulatory organization" for that FCM.

Devaluation: A formal "official" decrease in the value of a country's currency, typically by that country.

Diagonal Spread: A spread between two call options or two put options with different strike prices and different expiration dates.

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

Direct quotation: Quoting in fixed units of foreign currency against variable amounts of the domestic currency.

Dirty Float: Floating a currency when the rate is controlled by intervention by the monetary authorities.

Discount: (1) The amount a price would be reduced to purchase a commodity of lesser grade; (2) sometimes used to refer to the price differences between futures of different delivery months, as in the phrase "July at a discount to May," indicating that the price for the July futures is lower than that of May.

Discount Basis: Method of quoting securities where the price is expressed as a annualized discount from maturity value.

Discount Bond: A bond selling below par. See Par.

Discretionary Account: An arrangement by which the holder of an account gives written power of attorney to someone else, often a broker, to buy and sell without prior approval of the holder; often referred to as a "managed account" or "controlled account." See Controlled Account.

Distant or Deferred Delivery: Usually means one of the more distant months in which futures trading is taking place.

Doji: A candlestick formation in which the open and close are the same (or almost the same). Different varieties of doji lines (such as a gravestone or long-legged doji) depend on where the opening and close are in relation to the entire range. Doji lines are among the most important individual candlestick lines. They are also components of important candlestick patterns.

Dominant Future: That future having the largest number of open contracts.

Double Hedging: As used by the CFTC, it implies a situation where a trader holds a long position in the futures market in excess of the speculative limit as an offset to a fixed price sale even though the trader has an ample supply of the underlying on hand to fill all sales commitments.

Double Top -or- Double Bottom: Prices reaching their 12-month high or 12-month low two times. The second top or bottom may be used as a new number one point or may be considered the three point in a 1-2-3 formation.

DSRO: See Designated Self Regulatory Organization.

Dual Trading: Dual trading occurs when: (1) a floor broker executes customer orders and, on the same day, trades for his own account or an account in which he has an interest; or (2) an FCM carries customer accounts and also trades or permits its employees to trade in accounts in which it has a proprietary interest, also on the same trading day.

Duration: A measure of a bond's price sensitivity to changes in interest rates.

 

 

 

E

Early Exercise: The exercise of an option contract before its expiration date.

Ease Off: A minor and/or slow decline in the price of a market.

Economic Exposure: The risk on a company’s cash flow arising from foreign exchange fluctuations.

Economic Indicator: A government issued statistic that indicates current economic growth and stability. Common indicators include employment rates, Gross Domestic Product (GDP), inflation, retail sales, etc.

ECU: See European Currency Unit.

EDI: Electronic Data Interchange.

Effective Exchange Rate: An attempt to summarize the effects on a country's trade balance of its currency's changes against other currencies.

Efficient Market: A market in which new information is immediately available to all investors and potential investors. A market in which all information is instantaneously assimilated and therefore has no distortions.

EFP: Exchange for Physical. See Exchange of Futures for Cash.

EFT: Electronic Fund Transfer.

Electronic Exchange (Electronic Trading Exchange): A trading exchange that exists entirely in cyberspace. There is no exchange trading floor and no open outcry. Trading is done via computer matching of orders, and the physical location of the exchange administration need not be in the same physical location as the computer that houses the exchange. An example would be the Hang-Seng Index, an index comprised of stocks on the Hong-Kong stock exchange. The exchange administration is located in Hong-Kong, but trading takes place on a computer located at the Matif Exchange in the nation of France.

Electronic Order Entry: Orders issued via an electronic device directly to a receiving device in an open outcry trading pit. Orders issued via an electronic device and received on an all electronic trading platform where the orders are matched for execution.

Electronic Order Routing: Orders issued via an electronic device directly to a receiving device in an open outcry trading pit, or to a receiving device on a trading floor, and then carried into the trading pit by a runner, or arbed into the trading pit via hand signal.

Electronic Trading: Trading done on a fully electronic trading exchange.

Elliot Wave: (1) A theory named after Ralph Elliot, who contended that the stock market tends to move in discernible and predictable patterns reflecting the basic harmony of nature; (2) in technical analysis, a charting method based on the belief that all prices act as wavers, rising and falling rhythmically.

EMS: European Monetary System.

End Of Day Order (EOD): An order to buy or sell at a specified price. This order remains open until the end of the trading day which is typically 5PM ET.

Envelopes: While Bollinger Bands place boundary lines based on standard deviation, envelopes place lines at fixed percentage points above and below a moving average line. The upper and lower limits specify entry and exit points for currency traders.

Equilibrium Price: The market price at which the quantity supplied of a commodity equals the quantity demanded.

Equity: The residual dollar value of a futures, option, or leverage trading account, assuming it was liquidated at current prices.

Euro: The official currency of the European Economic Community. It’s symbol is €.

Eurocurrency: Certificates of Deposit (CDS), bonds, deposits, or any capital market instrument issued outside of the national boundaries of the currency in which the instrument is denominated (for example, Euro-Swiss francs, Euro-Deutsche marks, eurodollars, eurodollar bonds, or eurodollar CDS).

Eurodollar or Eurodollar Time Deposits: U.S. dollar deposits placed with banks outside the U.S., either a foreign bank or the subsidiary of a U.S. bank. Holders may include individuals, companies, banks and central banks. The interest paid for these dollar deposits generally is higher than that for funds deposited in U.S. banks situated in the U.S. because foreign banks are considered to be more risky, i.e. they will not be supported or nationalized by the U.S. government upon default.

Eurodollar Bonds: Bonds issued in Europe by corporate or government interests outside the boundary of the national capital market, denominated in dollars.

Eurodollar CDS: Dollar-denominated certificates of deposit issued by a bank outside of the United States, either a foreign bank or U.S. bank subsidiary.

European Central Bank (ECB):The Central Bank for the new European Monetary Union.

European Currency Unit: The official unit of account of the European Monetary System. It is a combination or basket of the currencies from the twelve European Community countries: the Deutsche mark, French franc, British pound sterling, Irish pound, Italian lira, Belgian franc, Dutch guilder, Luxembourg franc, Greek drachma, Spanish peseta, Portuguese escudo, and the Danish krona.

European Monetary System: A system designed to stabilize if not eliminate exchange risk between member states of the EMS as part of the economic convergence policy of the EU. It permits currencies to move in a measured fashion (divergence indicator) within agreed bands (the parity grid) with respect to the ECU and consequently with each other.

European Monetary Union (EMU) - The principal goal of the EMU is to establish a single European currency called the Euro, which will officially replace the national currencies of the member EU countries in 2002. On Janaury1, 1999 the transitional phase to introduce the Euro began. The Euro now exists as a banking currency and paper financial transactions and foreign exchange are made in Euros. This transition period will last for three years, at which time Euro notes an coins will enter circulation. On July 1,2002, only Euros will be legal tender for EMU participants, the national currencies of the member countries will cease to exist. The current members of the EMU are Germany, France, Belgium, Luxembourg, Austria, Finland, Ireland, the Netherlands, Italy, Spain and Portugal.

Even Lot: A unit of trading in a futures established by an exchange to which official price quotations apply. See Round Lot.

Even Up: To close out, liquidate, or cover an open position. Also to check a position with the broker for agreement as to its current standing.

Exchange Control: A system of controlling inflows and out flows of foreign exchange, devices include licensing multiple currencies, quotas, auctions, limits, levies and surcharges.

Exchange of Futures for Cash: A transaction in which the buyer of a cash commodity transfers to the seller a corresponding amount of long futures contracts, or receives from the seller a corresponding amount of short futures, at a price difference mutually agreed upon. In this way the opposite hedges in futures of both parties are closed out simultaneously. Also called EFP (Exchange for Physical), AA (Against Actuals) or Ex-Pit transactions.

Exchange Rate: The price of one currency stated in terms of another currency.

Exchange Risk Factor: The delta value of an option as computed daily by the exchange on which it is traded.

Execution: The Process of completing an order or deal.

Exercise: To elect to buy or sell, taking advantage of the right (but not the obligation) conferred by an option contract.

Exercise (or Strike) Price: The price specified in the option contract at which the buyer of a call can purchase the underlying during the life of the option, and the price specified in the option contract at which the buyer of a put can sell the underlying during the life of the option.

Exotic: A less broadly traded currency.

Exotic Options: Any of a wide variety of options with non-standard payout structures, including Asian options and Lookback options. Exotic options are mostly traded in the over-the-counter market.

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: The date on which an option contract automatically expires; the last day an option can be exercised.

Exponentially Weighted Moving Average (EMA): While the simple moving average distributes weight equally across the data series, exponentially weighted moving averages place greater weight to more recent data. As a result, they tend to provide a faster signal.

Exposure - (i) Net working capital - The current assets in a foreign currency minus current liabilities in the currency; (ii) Net financial method The current assets in a foreign currency minus current liabilities and long term debt in the currency; (iii) Monetary/non-monetary method - Monetary assets and liabilities in the foreign currency are valued at present exchange rates, while non-monetary items are entered at the relevant historic rates.

Extrinsic Value: See Time Value.

Ex-Pit: See Transfer Trades and Exchange of Futures for Cash.

Exposure: In foreign exchange, a potential for gain or loss because of movement in foreign exchange rate.

 

 

 

F

FAB Spread: Five Against Bond. A futures spread trade involving the buying (selling) of a five-year Treasury bond futures contract and the selling (buying) of a long-term (15-30 year) Treasury bond futures contract.

Fair Value: The theoretical price at which the S&P Future should trade above the cash index.

Fannie Mae: See Federal National Mortgage Association.

FAN Spread: Five Against Note. A futures spread trade involving the buying (selling) of a five-year Treasury note futures contract and the selling (buying) of a ten-year Treasury bond futures contract.

Fast Market: An official condition in a trading pit where transactions in the pit or ring are taking place in such volume and with such rapidity that the pit chairman calls an official fast market condition. (See Fast Tape).

Fast Tape: Transactions in the pit or ring take place in such volume and with such rapidity that price reporters are behind with price quotations, so insert "FAST" and show a range of prices.

Federal Deposit Insurance Corporation (FDIC): The regulatory agency responsible for administering bank depository insurance in the United States.

Federal National Mortgage Association (FNMA): A corporation created by Congress to support the secondary mortgage market; it purchases and sells residential mortgages insured by the Federal Home Administration (FHA) or guaranteed by the Veteran's Administration (VA).

Federal Reserve Board: A board of Directors comprised of seven members which directs the federal banking system, is appointed by the President of the United States, and confirmed by the Senate. The functions of the board include formulating and executing monetary policy, overseeing the Federal Reserve Bank, and regulating and supervising member banks. Monetary policy is implemented through the purchase or sale of securities, and by raising or lowering the discount rate — the interest rate at which banks borrow from the Federal Reserve.

Federal Reserve System: The central banking system of the US comprising 12 Federal Reserve Banks controlling 12 districts under the Federal Reserve Board. Membership of the Fed is compulsory for banks chartered by the Comptroller of Currency and optional for state chartered banks.

Fed: The United States Federal Reserve. Federal Deposit Insurance Corporation Membership is compulsory for Federal Reserve members. The corporation had deep involvement in the Savings and Loans crisis of the late 80s.

Fed Fund Rate: The interest rate on Fed funds. This is a closely watched short term interest rate as it signals the Feds view as to the state of the money supply.

Feed Ratio: The relationship of the cost of feed, expressed as a ratio to the sale price of animals, such as the corn-hog ratio. These serve as indicators of the profit margin or lack of profit in feeding animals to market weight.

FIA: See Futures Industry Association.

Fictitious Trading: Wash trading, bucketing, cross trading, or other schemes which give the appearance of trading. Actually, no bona fide, competitive trade has occurred.

Fill or Kill Order: An order which demands immediate execution or cancellation.

Filler: Broker who executes customer orders either electronically or through open-outcry.

Fill Price:The price at which a buy or sell order was executed.

Financial Instruments: As used by the CFTC, this term generally refers to any futures or option contract that is not based on an agricultural commodity or a natural resource. It includes currencies, securities, mortgages, commercial paper, and indices of various kinds.

Financial Futures: Include interest rate futures, currency futures, and index futures.

Financial Risk: The risk that a firm will be unable to meet its financial obligations.

First In First Out (FIFO): Open positions are closed according to the FIFO accounting rule. All positions opened within a particular currency pair are liquidated in the order in which they were originally opened.

First Notice Day: The first day on which notices of intent to deliver actuals against futures market positions can be received. First notice day may vary with each futures and exchange.

Fisher Effect: The relationship that exists between interest rates and exchange rate movements, so that in an ideal situation interest rate differentials would be exactly off set by exchange rate movements. See interest rate parity.

Fix, Fixing: See Gold Fixing.

Fixed Exchange Rate: Official rate set by monetary authorities. Often the fixed exchange rate permits fluctuation within a band.

Fixed Income Security: A security whose nominal (or current dollar) yield is fixed or determined with certainty at the time of purchase.

Flat: Term describing a trading book with no market exposure.

Flexible Exchange Rate: Exchange rates with a fixed parity against one or more currencies with frequent revaluation's. A form of managed float.

Floating Exchange Rate: An exchange rate where the value is determined by market forces. Even floating currencies are subject to intervention by the monetary authorities. When such activity is frequent the float is known as a dirty float.

Floor Broker: Any person who, in any pit, ring, post or other place provided by a contract market for the meeting of persons similarly engaged, executes for another person any orders for the purchase or sale of any commodity or financial instrument for future delivery.

Floor Trader: An exchange member who executes his own trades by being personally present in the pit for futures trading. See Local.

F.O.B. (Free On Board): Indicates that all delivery, inspection and elevation or loading costs involved in putting commodities on board a carrier have been paid.

FOMC: Federal Open Market Committee, the committee that sets money supply targets in the US which tend to be implemented through Fed Fund interest rates etc.

Forced Liquidation: The situation in which a customer's account is liquidated (open positions are offset) by the brokerage firm holding the account, usually after notification that the account is undercapitalized (margin calls).

Force Majeure: A clause in a supply contract which permits either party not to fulfill the contractual commitments due to events beyond their control. These events may range from strikes to export delays in producing countries.

Foreign Exchange: Foreign Currency. On the foreign exchange market, foreign currency is bought and sold for immediate or future delivery.

FOREX: An acronym for the Foreign Exchange Market. FOREX is a cash market where the currencies for many nations are traded via brokers located in various parts of the world. FOREX transactions are not traded in futures markets.

Forex Club: Groups formed in the major financial centers to encourage educational and social contacts between foreign exchange dealers, under the umbrella of Association Cambiste International.

Forward: In the future.

Forwardation: See Contango.

Forward Contracting or Forward Contract: A cash transaction common in many industries, including commodity merchandising, in which a commercial buyer and seller agree upon delivery of a specified quality and quantity of goods at a specified future date. A price may be agreed upon in advance, or there may be agreement that the price will be determined at the time of delivery. Forward contract differ from futures contracts in that with futures contracts, quality, quantity, price, and place of delivery are all established by the Exchange as opposed to establishment of these factors by the individual parties to the agreement.

Forward Margins: Discounts or premiums between spot rate and the forward rate for a currency. Normally quoted in points.

Forward Market: Refers to informal (non-exchange) trading of commodities to be delivered at a future date. Contracts for forward delivery are "personalized" (i.e., delivery time and amount are as determined between seller and customer).

Forward Months: Futures contracts, currently trading, calling for later or distant delivery. See Deferred Futures.

Forward Operations: Foreign exchange transactions, on which the fulfillment of the mutual delivery obligations is made on a date later than the second business day after the transaction was concluded.

Forward Outright: A commitment to buy or sell a currency for delivery on a specified future date or period. The price is quoted as the Spot rate minus or plus the forward points for the chosen period.

Forward Points: The points that are added to or subtracted from the spot rate to calculate the forward rates for a forward foreign exchange transaction. These points are based on the differential between the interest rates of the two currency pairs.

Forward Price: (See forward rates).

Forward Purchase or Sale: A purchase or sale between commercial parties of an actual commodity for deferred delivery.

Forward Rates: The net price resulting from calculating the forward points and subtracting them from the existing spot rate. This is the rate at which a currency can be purchased or sold for delivery in the future.

Free Crowd System: A system of trading, common to most U.S. non-electronic futures exchanges, where all floor members may bid and offer simultaneously either for their own accounts or for the accounts of customers, and transactions may take place simultaneously at different places in the trading ring. Also see Board Broker System and Specialist System.

Free Reserves: Total reserves held by a bank less the reserves required by the authority.

Front Office: The activities carried out by the dealer , normal trading activities.

Frontrunning: With respect to futures and options, taking a futures or option position based upon non-public information regarding an impending transaction by another person in the same or related future or option.

Full Carrying Charge, Full Carry: See Carrying Charges.

Fundamental Analysis: Study of basic, underlying factors such as weather, wars, discoveries, and changes is government policy, which will affect the supply and demand of the underlying being traded in futures contracts. See Technical Analysis.

Fungibility: The characteristic of interchangeability. Futures contracts for the same commodity or financial instrument and delivery month are fungible due to their standardized specifications for quality, quantity, delivery date and delivery locations.

Futures: See Futures Contract.

Futures Commission Merchant (FCM): Individuals, associations, partnerships, corporations and trusts that solicit or accept orders for the purchase or sale of any commodity or financial instrument for future delivery on or subject to the rules of any contract market and that accept payment from or extend credit to those whose orders are accepted.

Futures Contract An agreement to purchase or sell a commodity, currency, Index, or financial instrument for delivery in the future: (1) at a price that is determined at initiation of the contract; (2) which obligates each party to the contract to fulfill the contract at the specified price; (3) which is used to assume or shift price risk; and (4) which may be satisfied by delivery or offset. The terms of the agreement are set by exchanges. In the case of a currency, index, financial instrument, or certain commodities (e.g., lean hogs), the purchase or sale is completed by delivery and acceptance of cash.

Futures-equivalent: A term frequently used with reference to speculative position limits for options on futures contracts. The futures-equivalent of an option position is the number of options multiplied by the previous day's risk factor or delta for the option series. For example, 10 deep out-of-money options with a risk factor of 0.20 would be considered 2 futures-equivalent contracts. The delta or risk factor used for this purpose is the same as that used in delta-based margining and risk analysis systems.

Futures Exchange: A central marketplace with established rules and regulations where buyers and sellers meet to trade futures and options on futures contracts.

Futures Industry Association (FIA): A membership organization for futures commission merchants (FCMs) which, among other activities, offers education courses on the futures markets, disburses information and lobbies on behalf of its members.

Futures Price: (1) Commonly held to mean the price of a commodity for future delivery that is traded on a futures exchange. (2) The price of any futures contract.

FX: Foreign Exchange. An over-the-counter market where buyers and sellers conduct foreign exchange transactions. also called foreign exchange market.

 

 

 

G

G7: The seven leading industrial countries, being US , Germany, Japan, France, UK, Canada, Italy.

G10: G7 plus Belgium, Netherlands and Sweden, a group associated with IMF discussions. Switzerland is sometimes peripherally involved.

Gamma :A measurement of how fast delta changes, given a unit change of the underlying futures price.

Gap: A mismatch between maturities and cash flows in a bank or individual dealers position book. Gap exposure is effectively interest rate exposure.

Ginnie Mae: Pass-through mortgage-backed certificates guaranteed by the Government National Mortgage Association (GNMA or Ginnie Mae). The certificates are backed by pools of FHA insured and/or VA guaranteed residential mortgages, with the mortgage and not held in safekeeping by a custodial financial institution. Also called G.N.M.A.s or G.N.M.A. certificates.

Ginzy Trading: A trade practice in which a floor broker, in executing an order -- particularly a large order -- will fill a portion of the order at one price and the remainder of the order at another price to avoid an exchange's rule against trading at fractional increments or "split ticks." In In re Murphy, [1984-86 Transfer Binder] Comm. Fut L. Rep. (CCH) at pp. 31,353-4 (Sept. 25, 1985), the Commission found that ginzy trading was a noncompetitive trading practice in violation of section 4c(a)(B) of the Commodity Exchange Act and CFTC regulation 1.38(a).

Give Up: A contract executed by one broker for the client of another broker that the client orders to be turned over to the second broker. The broker accepting the order from the customer collects a wire toll from the carrying broker for the use of the facilities. Often used to consolidate many small orders or to disperse large ones.

Globex: An international electronic trading system for futures and options that allows participating exchanges to list their products for trading after the close of the exchanges' open outcry trading hours. Developed by Reuters Limited for use by the Chicago Mercantile Exchange (CME), Globex was launched on June 25, 1992, for certain CME contracts. Various MATIF (Marche a Terme International de France) contracts began trading on the system on March 15, 1993.

G.N.M.A.: The Government National Mortgage Association; a government agency within the Department of Housing and Urban Development that, among other things, guarantees payment on mortgage-backed certificates. (See Ginnie Mae).

Going Long: Someone who expects a futures price to increase over a given period of time can seek to profit by buying futures contracts. The futures contract can later be sold for the higher price, yielding profits. Because of leverage, the gain or loss may be greater than the initial margin deposit.

Going Short: Someone who expects futures prices to decline. They would sell futures contracts in the anticipation of lower prices, and the hope of later being able to buy back identical and offsetting contract at a lower price, yielding profits. It differs from going long is in the sequence of the trades. Instead of first buying a futures contract, you
first sell a futures contract. If, as expected, the price declines, a profit can be realized by later purchasing an offsetting futures contract at the lower price. The gain per unit will be the amount by which the purchase price is below the earlier selling price.

Gold Certificate: A certificate attesting to a person's ownership of a specific amount of gold bullion.

Gold Fixing (Gold Fix): The setting of the gold price at 10:30 AM (first fixing) and 3:00 PM (second fixing) in London by five representatives of the London Gold Market. See London Gold Market.

Gold/Silver Ratio: The number of ounces of silver required to buy one ounce of gold at current spot prices.

Gold Standard: The original system for supporting the value of currency issued. The was that where the price of gold is fixed against the currency it means that the increased supply of gold does not lower the price of gold but causes prices to increase.

Good This Week Order (GTW): Order which is valid only for the week in which it is placed.

Good 'Til Canceled Order (GTC): Order which is valid at any time during market hours until executed or canceled. See Open Order.

GPM: See Gross Processing Margin.

Grades: Various qualities of a commodity.

Grading Certificates: A formal document setting forth the quality of a commodity as determined by authorized inspectors or graders.

Grain Futures Act: Federal statute which regulated trading in grain futures, effective June 22, 1923; administered by the U.S. Department of Agriculture; amended in 1936 by the Commodity Exchange Act.

Grantor: The maker, writer, or issuer of an option contract who, in return for the premium paid for the option, stands ready to purchase the underlying commodity (or futures contract) in the case of a put option or to sell the underlying commodity (or futures contract) in the case of a call option.

Grid: Fixed margin within which exchange rates are allowed to fluctuate.

Gross Domestic Product: The value of all final goods and services produced by an economy over a particular time period, normally a year.

Gross National Product: 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): Refers to the difference between the cost of a commodity and the combined sales income of the finished products which result from processing the commodity. Various industries have formulas to express the relationship of raw material costs to sales income from finished products. See Crack and Crush.

GTC: See Good 'Til Canceled order.

GTW: See Good This Week order.

 

 

 

H

Haircut: (1) In determining whether assets meet capital requirements, a percentage reduction in the stated value of assets. (2) In computing the worth of assets deposited as collateral or margin, a reduction from market value.

Handle: Describes the whole number at which a futures contract is traded. In the S&P 500 a "handle" is on dollar unit or 100 points. If the market is trading at 844.00, ("or 4 even,"), and moves up to the next handle, then the S&P¹s would be trading at 845.00, (or "45 even"). When not in front of a quote screen it is crucial to listen for the "handle", an indication that the markets are moving quickly.

Hard currency: A currency whose value is expected to remain stable or increase in terms of other currencies.

Hardening: (1) Describes a price which is gradually stabilizing; (2) a term indicating a slowly advancing market.

Head and Shoulders: A pattern in price trends which chartist consider indicates a price trend reversal. The price has risen for some time, at the peak of the left shoulder, profit taking has caused the price to drop or level. The price then rises steeply again to the head before more profit taking causes the the price to drop to around the same level as the shoulder. A further modest rise or level will indicate a that a further major fall is imminent. The breach of the neckline is the indication to sell.

Heavy: A market in which prices are demonstrating either an inability to advance or a slight tendency to decline.

Hedge Ratio: Ratio of the value of futures contracts purchased or sold to the value of the cash commodity being hedged, a computation necessary to minimize basis risk.

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 quality and type as the initial transaction.

Hedging: Taking a position in a futures market opposite to a position held in the cash market to minimize the risk of financial loss from an adverse price change; a purchase or sale of futures as a temporary substitute for a cash transaction that will occur later. Hedging is done to transfer the risk of loss. The position in the futures market is opposite to the position held in the cash market; i.e., a long cash position is hedged with a short futures position (short hedge), and vice-versa (long hedge).

High: The highest price of the day for a particular futures contract.

"Hit the bid": Acceptance of purchasing at the offer or selling at the bid.

Hog-Corn Ratio: See Feed Ratio.

Holder: An individual who pays the option seller a premium for the right to buy (in the case of a call) or sell (in the case of a put) the underlying instrument at the specified strike price on or before the expiration date. See Option Buyer.

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.

Hybrid-Instruments: Financial instruments that possess, in varying combinations, characteristics of forward contracts, futures contracts, option contracts, debt instruments, bank depository interests, and other interests. Certain hybrid instruments are exempt from CFTC regulation.

 

 

 

I

IB: See Introducing Broker.

IMF: International Monetary Fund, established in 1946 to provide international liquidity on a short and medium term and encourage liberalization of exchange rates. The IMF supports countries with balance of payments problems with the provision of loans.

IMM: International Monetary Market part of the Chicago Mercantile Exchange that lists a number of currency and financial futures Implied volatilityA measurement of the market's expected price range of the underlying currency futures based on the traded option premiums.

Illiquidity: Illiquid markets are typified by low levels of trading, with little underlying stock readily available.  Buying and selling can cause exaggerated price fluctuations.

Implied Rates: The interest rate determined by calculating the difference between spot and forward rates.

Index Arbitrage: The simultaneous purchase (sale) of stock index futures and the sale (purchase) of some or all of the component stocks which make up the particular stock index to profit from sufficiently large intermarket spreads between the futures contract and the index itself.

Indicative quote: A market-maker's price which is not firm.

Inflation: Continued rise in the general price level in conjunction with a related drop in purchasing power. Sometimes referred to as an excessive movement in such price levels.

Initial Deposit: See Initial Margin.

Initial Margin: Customers' funds put up as security for a guarantee of contract fulfillment at the time a futures market position is established. See Original Margin.

Initial Margin Requirement:The minimum portion of a new security purchase that an investor must pay for in cash.

Initial Performance Bond: See Initial Margin.

In Sight: The amount of a particular commodity that arrives at terminal or central locations is or near producing areas. When a commodity is "in sight," it is inferred that reasonably prompt delivery can be made; the quantity and quality also become known factors rather than estimates.

Instrument(s): See Financial Instruments.

Inter-bank rate: The bid and offer rates at which international banks place deposits with each other. The basis of the Interbank market.

Intercommodity Spread: A spread in which the long and short legs are in two different but generally related commodity or futures markets. Also called an intermarket spread. See Spread.

Interdelivery Spread: A spread involving two different months of the same commodity or futures contract. Also called an intracommodity spread. See Spread.

Interest Arbitrage - The operation wherein foreign debt instruments are purchased to profit from the higher interest rate in the foreign country over the home country. The operation is profitable only when the forward rate on the foreign currency is selling at a discount less than the premium on the interest rate. See Interest Rate Parity.

Interest Rate Futures: Futures contracts traded on fixed income securities such as G.N.M.A.s, U.S. Treasury issues, Eurodollars, 30-day Fed Funds, LIBOR, PIBOR, FIBOR, or CDS. Currency is excluded from this category, even though interest rates are a factor in currency values.

Interest Rate Parity - The formal theory of interest rate parity holds that under normal conditions the forward premium or discount on a currency in terms of another is directly related to the interest differential between the two countries. For example, the forward rate discount (or premium) on Swiss francs in terms of dollars would equal the premium (or discount) of interest rates in Switzerland over (or under) those in the U.S. This theory holds only when there are unrestricted flows of international short-term capital. In reality, numerous economic and legal obstacles restrict the movement, so that actual parity is rare. See Interest Arbitrage.

Interest rate Swaps: An agreement to swap interest rate exposures from floating to fixed or vice versa. There is no swap of the principal. It is the interest cash flows be they payments or receipts that are exchanged.

Intermarket Spread: See Spread and Intercommodity Spread.

Internal Financing: Using the profit from one contract to finance the margin on another.

International Commodities Clearinghouse (ICCH): An independent organization that serves as a clearinghouse for most futures markets in London, Bermuda, Singapore, Australia, and New Zealand.

Internationalization: Referring to a currency that is widely used to denominate trade and credit transactions by non residents of the country of issue. US dollar and Swiss Franc are examples.

Intervention: Action by a central bank to effect the value of its currency by entering the market. Concerted intervention refers to action by a number of central banks to control exchange rates.

In-The-Money: A term used to describe an option contract that has a positive value if exercised. A call at $400 on gold trading at $10 is in-the-money 10 dollars.

Intracommodity Spread: See Spread and Interdelivery Spread.

Intrinsic Value: A measure of the value of an option or a warrant if immediately exercised. The amount by which the current price for the underlying commodity or futures contract is above the strike price of a call option or below the strike price of a put option for the commodity or futures contract.

Introducing Broker (or IB): Any person (other than a person registered as an "associated person" of a futures commission merchant) who is engaged in soliciting or in accepting orders for the purchase or sale of any commodity or futures contract for future delivery on an exchange who does not accept any money, securities, or property to margin, guarantee, or secure any trades or contracts that result therefrom.

Inverted Market: A futures market in which the nearer months are selling at prices higher than the more distant months; a market displaying "inverse carrying charges," characteristic of markets with supply shortages. The notable exceptions are interest rate futures, which are inverted when the distant contracts are at a premium to near-month contracts. See Backwardation.

Invisible Supply: Uncounted stocks of a commodity in the hands of wholesalers, manufacturers and producers which cannot be identified accurately; stocks outside commercial channels but theoretically available to the market.

ISDA: The International Swap Dealers Association, Inc., a New York-based group of major international swap dealers, which has published the Code of Standard Wording, Assumptions and Provisions for Swaps, or Swaps Code, for U.S. dollar interest rate swaps as well as standard master interest rate and currency swap agreements and definitions for use in connection with the creation and trading of swaps.

 

 

 

J

Jobber:A trader who trades for small, short-term profits during the course of a trading session, rarely carrying a position overnight.

Job Lot: A form of contract having a smaller unit of trading than is featured in a regular contract.

 

 

 

K

K:A Nasdaq stock symbol specifying that the stock has no voting rights.

Kerb Trading or Dealing: See Curb Trading.

Kiwi: Slang for the New Zealand dollar.

 

 

 

L

Lagging Indicators: Market indicators showing the general direction of the economy confirming or denying the trend implied by the leading indicators.

Large Order Execution (LOX) Procedures: Rules in place at the Chicago Mercantile Exchange that authorize a member firm which receives a large order from an initiating party to solicit counterparty interest off the exchange floor prior to open execution of the order in the pit and that provide for special surveillance procedures. The parties determine a maximum quantity and an "intended execution price." Subsequently, the initiating party's order quantity is exposed to the pit; any bids (or offers) up to and including those at the intended execution price are hit (acceptable). The unexecuted balance is then crossed with the contraside trader found using the LOX procedures.

Large Traders: A large trader is one who holds or controls a position in any one futures or in any one option expiration series of a commodity or financial instrument on any one contract market equaling or exceeding the exchange or CFTC-specified reporting level.

Last Notice Day: The final day on which notices of intent to deliver on futures contracts may be issued.

Last Trading Day: Day on which trading ceases for the maturing (current) delivery month.

Law of Demand: Demand exhibits a direct relationship to price. If all other factors remain constant, an increase in demand leads to an increase in price, while a decrease in demand leads to a decrease in price.

Law of Supply: Supply exhibits an inverse relationship to price. If all other factors remain constant, an increase in supply leads to a decrease in price, while a decrease in supply leads to an increase in price.

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.

Leaps: Long-dated, exchange-traded options.

Leverage Contract: A contract, standardized as to terms and conditions, for the long-term (ten years or longer) purchase (long leverage contract) or sale (short leverage contract) by a leverage customer of leverage commodity which provides for: (1) participation by the leverage transaction merchant as a principal in each leverage transaction; (2) initial and maintenance margin payments by the leverage customer; (3) periodic payment by the leverage customer or accrual by the leverage transaction merchant to the leverage customer of a variable carrying charge or fee on the initial value of the contract plus any margin deposits made by the leverage customer in connection with a short leverage contract; (4) delivery of a commodity in an amount and form which can be readily purchased and sold in normal commercial or retail channels; (5) delivery of the leverage commodity after satisfaction of the balance due on the contract; and (6) determination of the contract purchase and repurchase, or sale and resale, prices by the leverage transaction merchant.

Leverage Dealer: See Leverage Transaction Merchant.

Leverage Transaction Merchant: Any individual, association, partnership, corporation, or trust that is engaged in the business of offering to enter into, entering into, or confirming the execution of leverage contracts, or soliciting or accepting orders for leverage contracts, and who accepts leverage customer funds or extends credit in lieu of those funds.

Liability: In terms of foreign exchange , the obligation to deliver to a counterparty an amount of currency either in respect of a balance sheet holding at a specified future date or in respect of an un-matured forward or spot transaction.

LIBOR: The London Inter-Bank Offered Rate. Banks use LIBOR when borrowing from another bank.

Licensed Warehouse: A warehouse approved by exchange from which a commodity may be delivered on a futures contract. See Regular Warehouse.

Life of Contact: Period between the beginning of trading in a particular futures contract and the expiration of trading. In some cases this phrase denotes the period already passed in which trading has already occurred. For example, "The life-of-contract high so far is $2.50." Same as Life of Delivery or Life of the Future.

Limit (Up or Down): The maximum price advance or decline from the previous day's settlement price permitted during one trading session, as fixed by the rules of an exchange. See Daily Price Limits.

Limit Move: A price that has advanced or declined the permissible limit during one trading session, as fixed by the rules of a contract market.

Limit Only: The definite price stated by a customer to a broker restricting the execution of an order to buy for not more than, or to sell for not less than, the stated price.

Limit Order: An order in which the customer specifies a price limit or other condition, such as time of an order, as contrasted with a market order which implies that the order should be filled as soon as possible.

Limited Risk Spread: A bull spread in a market where the priced difference between the two contract months covers the full carrying charges. The risk is limited because the probability of the distant month price moving to a premium greater than full carrying charges is minimal.

Liquidation: The closing out of a long position. The term is sometimes used to denote closing out a short position, but this is more often referred to as covering. For an open long, this would be selling the contract. For a short position, it would be buying the contract back (short covering, or covering his short). See Cover.

Liquid Market or Liquidity: A market in which selling and buying can be accomplished with minimal price change. Liquidity refers to a market which allows quick and efficient entry or exit at a price close to the last traded price. This ability to liquidate or establish a position quickly is due to a large number of traders willing to buy and sell. The market is said to flow like liquid, or have liquidity.

Live Data: Data available via the Internet, receiving dish, or computer connected terminal. Some exchanges define live data as data able to be received within five minutes of the time a trading event has occurred on the trading floor. Live data on an electronic exchange is within seconds of a trading event taking place on the electronic exchange.

Local: A member of a U.S. exchange who trades for his own account and/or fills orders for customers and whose activities provide market liquidity. See Floor Trader.

Locked-In: A hedged position that cannot be lifted without offsetting both sides of the hedge (spread). See Hedging. Also refers to being caught in a limit price move.

Lock Limit: The event when prices have risen or fallen by the maximum daily limit, and there is presently no trading in the contract. It may not be possible to execute your order at any price. A market may be lock limit for more than one day, resulting in substantial losses to you when you find it impossible to liquidate losing futures positions.

London Gold Market: Refers to the five dealers who set (fix) the gold price in London: Mocatta & Goldsmid, N. Rothschild & Sons, Johnson Matthey, Sharps Pixley, and Samuel Montagu & Co.

London Option: A generic term sometimes used to describe options on physical commodities or on futures contracts traded abroad (typified by options on London commodity markets). These options, which often had nothing whatsoever to do with legitimate foreign markets, gained notoriety--prior to their ban in the United States in 1978--because of the sales practices and fraud allegations associated with the American dealers who sold them.

Long: (1) One who has bought a futures contract to establish a market position, generally in anticipation of a price increase.; (2) a market position which obligates the holder to take delivery; (3) one who owns an inventory of commodities. See Short.

Long Hedge: Purchase of futures against the fixed price forward sale of a cash commodity.

Long Position:In foreign exchange, when a currency pair is bought, it is understood that the primary currency in the pair is 'long', and the secondary currency is 'short'.

Long the Basis: A person or firm that has bought the spot commodity and hedged with a sale of futures is said to be long the basis. The trader who is long the basis profits from the basis becoming more positive (stronger); for example, if a farmer sold a January soybean futures contract at $6.00 with the cash market at $5.80, the basis is minus .20. If he repurchased the January contract later at $5.50 when the cash price was $5.40, the basis would then be minus .10. The trader would have profited from the hedge by a 10 cent increase in basis.

Lookback Option: An option whose payoff depends on the minimum or maximum price of the underlying asset during some portion of the life of the option.

Lot: A unit of trading. See Even Lot, Job Lot, and Round Lot.

Low: The lowest price of the day for a particular futures contract.

LTM: Leverage Transaction Merchant.

 

 

 

M

Maintenance Margin: See Margin.

Managed Account: See Controlled Account and Discretionary Account.

Make a market: A dealer is said to make a market when he or she quotes bid and offer prices at which he or she stands ready to buy and sell.

Managed float: When the monetary authorities intervene regularly in the market to stabilize the rates or to aim the exchange rate in a required direction.

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: The amount of money or collateral deposited by a customer with his broker, by a broker with a clearing member, or by a clearing member with the clearinghouse, for the purpose of insuring the broker or clearinghouse against loss on open futures contracts. The margin is not partial payment on a purchase. (1) Initial margin is the total amount of margin per contract required by the broker when a futures position is opened; (2) Maintenance margin is a sum which must be maintained on deposit at all times. If the equity in a customer's account drops to, or under, the level because of adverse price movement, the broker must issue a margin call to restore the customer's equity. See Variation Margin.

Margin Call: (1) A request from a brokerage firm to a customer to bring margin deposits up to initial levels; (2) a request by the clearinghouse to a clearing member to make a deposit of original margin, or a daily or intra-day variation payment, because of adverse price movement, based on positions carried by the clearing member.

Market Close:This refers to the time of day that a market closes. In the 24 hour-a-day foreign exchange market, there is no official market close. 5:00 PM EST is often referred to and understood as the market close because value dates for spot transactions change to the next new value date at that time.

Market Correction: In technical analysis, a small reversal in prices following a significant trending period.

Marketer: See Distributor.

Market-if-Touched (MIT) Order: An order that becomes a market order when a particular price is reached. A sell MIT is placed above the market; a buy MIT is placed below the market. Also referred to as a board order.

Market Marker: A professional securities dealer who has an obligation to buy when there is an excess of sell orders and to sell when there is an excess of buy orders. By maintaining an offering price sufficiently higher than their buying price, these firms are compensated for the risk involved in allowing their inventory of securities to act as a buffer against temporary order imbalances. In the commodities industry, this term is sometimes loosely used to refer to a floor trader or local who, in speculating for his own account, provides a market for commercial users of the market. See Specialist System.

Market-on-Close: An order to buy or sell at the end of the trading session at a price within the closing range of prices. See Stop-Close-Only Order.

Market-on-Opening: An order to buy or sell at the beginning of the trading session at a price within the opening range of prices.

Market Order: An order to buy or sell a futures contract at whatever price is obtainable at the time it is entered in the ring or pit. Time, not price is of primary importance. See At-The-Market.

Market Rate:The current quote of a currency pair.

Market Risk:The risks that occur when general market pressures cause the value of an investment to fluctuate.

Market Value Weighted Index: A stock index in which each stock is weighted by market value. A change in the price of any stock will influence the index in proportion to the stock’s respective market value. The value of each stock is determined by multiplying the number of shares outstanding by the stock’s market price per share; therefore, a high-priced stock with a large number of shares outstanding has more impact than a low-priced stock with only a few shares outstanding. The S&P 500 is a value weighted index.

Mark-to-Market: Daily cash flow system used by U.S. futures exchanges to maintain a minimum level of margin equity for a given futures or option contract position by calculating the gain or loss in each contract position resulting from changes in the price of the futures or option contracts at the end of each trading day.

Maturity: Period within which a futures contract can be settled by delivery of the actuals.

Maximum Price Fluctuation: See Limit (Up or Down).

Member Rate: Commission charged for the execution of an order for a person who is a member of the exchange.

Micro economics: The study of economic activity as it applies to individual firms or well defined small groups of individuals or economic sectors.

Mid-price or middle rate: The price half-way between the two prices, or the average of both buying and selling prices offered by the market makers.

Minimum Price Contract: A hybrid commercial forward contract for agricultural products which includes a provision guaranteeing the person making delivery a minimum price for the product. For agricultural commodities, these contracts became much more common with the introduction of exchange-traded options on futures contracts, which permit buyers to hedge the price risks associated with such contracts.

Minimum Price Fluctuation: Smallest increment of price movement possible in trading a given contract.

Momentum: In technical analysis, the relative change in price over a specific time interval. Often equated with speed or velocity and considered in terms of relative strength.

Monetary Base: Currency in circulation plus banks' required and excess deposits at the central bank.

Money Market: Short-term debt instruments.

Money Supply: The amount of money in the economy, consisting primarily of currency in circulation plus deposits in banks. M1 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. M2 U.S. money supply consisting M1 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. M3 U.S. money supply consisting of M2 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.

 

 

 

N

Naked Call: See Naked Option.

Naked Option: The sale of a call or put option without holding an offsetting position in the underlying.

Naked Put: See Naked Option.

National Futures Association (NFA): A self regulatory organization composed of futures commission merchants, commodity pool operators, commodity trading advisors, introducing brokers, leverage transaction merchants, commodity exchanges, commercial firms, and banks, that is responsible--under CFTC oversight--for certain aspects of the regulation of FCMs, CPOs, IBs, LTMs, and their associated persons, focusing primarily on the qualifications and proficiency, financial condition, retail sales practices, and business conduct of these futures professionals.

Nearbys: The nearest delivery months of a commodity futures market.

Nearby Delivery Month: The month of the futures contract closest to maturity.

Negative Carry: The cost of financing a financial instrument (the short-term rate of interest), when the cost is above the current return of the financial instrument. See Carrying Charges and Positive Carry.

Net Position: The difference between the open long contracts and the open short contracts held by a trader in any one commodity or futures contract.

NFA: National Futures Association.

NOB Spread: Note Against Bond. A futures spread trade involving the buying (selling) of a Treasury note futures contract and the selling (buying) of a Treasury bond futures contract.

Non-Client Order:An order on an exchange that is made by a participant firm or on behalf of a partner, officer, director, or employee of the participant firm. Where a participant firm is a firm that is entitled to trade on the exchange, also known as a member firm. While these orders are allowed, priority must be given to client orders for the same securities.

Non-Member Traders: Speculators and hedgers who trade on the exchange through a member but do not hold exchange memberships.

Nominal Price (or Nominal Quotation): Computed price quotation on futures for a period in which no actual trading took place, usually an average of bid and asked prices.

Notice Day: Any day on which notices of intent to deliver on futures contracts may be issued.

Notice of Delivery: A notice that must be presented by the seller of a futures contract to the clearinghouse. The clearinghouse then assigns the notice and subsequent delivery instrument to a buyer. Also Notice of Intention to Deliver.

Notional Amount: The amount (in an interest rate swap, forward rate agreement, or other derivative instrument) or each of the amounts (in a currency swap) to which interest rates are applied (whether or not expressed as a rate or stated on a coupon basis) in order to calculate periodic payment obligations. Also called the notional principal amount, the contract amount, the reference amount, and the currency amount.

Number 1 Top: The highest price paid for a commodity in the last 12- months.

Number 1 Bottom: The lowest price paid for a commodity in the last 12- months.

 

 

 

O

Odd Lot: A non standard amount for a transaction.

Offer: An indication of willingness to sell at a given price; opposite of bid.

Offset or Offsetting: Liquidating a purchase of futures contracts through the sale of an equal number of contracts of the same delivery month, or liquidating a short sale of futures through the purchase of an equal number of contracts of the same delivery month. Offsetting eliminates the obligation to make or take delivery. See Cover.

Off-shore: The operations of a financial institution which although physically located in a country, has little connection with that country's financial systems. In certain countries a bank is not permitted to do business in the domestic market but only with other foreign banks. This is known as an off shore banking unit.

Omnibus Account: An account carried by one futures commission merchant with another futures commission merchant in which the transactions of two or more persons are combined and carried in the name of the originating broker rather than designated separately.

One Cancels the Other Order (OCO) :A combination of two orders in which the execution of either one automatically cancels the other.

On Track (or Track Country Station): (1) A type of deferred delivery in which the price is set f.o.b. seller's location, and the buyer agrees to pay freight costs to his destination; (2) commodities loaded in railroad cars on track.

Opening Price (or Range): The price (or price range) recorded during the period designated by the exchange as the official opening.

Opening, The: The period at the beginning of the trading session officially designated by the exchange during which all transactions are considered made "at the opening."

Open Interest: The total number of futures contracts long or short in a delivery month or market that has been entered into and not yet liquidated by an offsetting transaction or fulfilled by delivery. Also called Open Contracts or Open Commitments.

Open Order (or Orders): An order that remains in force until it is canceled or until the futures contracts expire. See Good 'Til Canceled and Good This Week orders.

Open Outcry: Method of public auction required to make bids and offers in the trading pits or rings of commodity trading futures exchanges. This method is supposed to assure the buyer and seller that they will obtain the best price available. It is not similar to the over-the-counter market for securities where a market maker determines the price, nor is it in any way similar to the way art and objects are auctioned off by an auctioneer. In open outcry, traders and brokers in the pit cry out to one another by shouting and hand signals in order to match buy and sell orders.

Open Position:Any position (long or short) that is subject to market fluctuations and has not been closed out by a corresponding opposite transaction.

Option: (1) An option is a unilateral contract which gives the buyer the right to buy or sell a specified quantity of the underlying commodity or financial security at a specific price within a specified period of time, regardless of the market price of that commodity or financial security. Also see Put and Call; (2) A term sometimes erroneously applied to a futures contract. It may refer to a specific delivery month, as the "July Option."

Option Buyer: The person who buys calls, puts, or any combination of calls and puts.

Option Grantor: The person who originates an option contract by promising to perform a certain obligation in return for the price of the option. Also known as Option Writer.

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.

Order:A customer's instructions to buy or sell currencies.

Original Margin: Term applied to the initial deposit of margin money each clearing member firm is required to make according to clearinghouse rules based upon positions carried, determined separately for customer and proprietary positions; similar in concept to the initial margin or security deposit required of customers by exchange regulations. See Initial Margin.

Out-Of-The-Money: A term used to describe an option that has no intrinsic value. For example, a call at $400 on gold trading at $390 is out-of-the-money 10 dollars.

Out Trade: A trade which cannot be cleared by a clearinghouse because the trade data submitted by the two clearing members involved in the trade differs in some respect (e.g., price and/or quantity). In such cases, the two clearing members or brokers involved must reconcile the discrepancy, if possible, and resubmit the trade for clearing. If an agreement cannot be reached by the two clearing members or brokers involved, the dispute would be settled by an appropriate exchange committee.

Overbought: A technical opinion that the market price has risen too steeply and too fast in relation to underlying fundamental factors. Rank and file traders who were bullish and long have turned bearish.

Overnight Limit: Net long or short position in one or more currencies that a dealer can carry over into the next dealing day. Passing the book to other bank dealing rooms in the next trading time zone reduces the need for dealers to maintain these unmonitored exposures.

Overnight Position:Trader's long or short position in a currency at the end of a trading day.

Overnight Trade: A trade which is not liquidated on the same trading day in which it was established.

Oversold: A technical opinion that the market price has declined too steeply and too fast in relation to underlying fundamental factors. Rank and file traders who were bearish and short have turned bullish.

Over-The-Counter (OTC): Market in which custom-tailored contracts are bought and sold between counterparties and not exchange traded.

Overvalued: Describing an instrument trading at a higher price than it logically should. Normally associated with the results of options price predictions by mathematical models. If an option is trading in the market for a higher price than the model indicates, the option is said to be overvalued.

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P

P&S (Purchase and Sale Statement): A statement sent by a commission house to a customer when any part of a futures position is offset, showing the number of contracts involved, the prices at which the contracts were bought or sold, the gross profit or loss, the commission charges, the net profit or loss on the transactions, and the balance.

Paper Profit or Loss: The profit or loss that would be realized if open contracts were liquidated as of a certain time or a certain price.

Par: (1) Refers to the standard delivery point(s) and/or quality of a commodity that is deliverable on a futures contract at contract price. Serves as a benchmark upon which the base discounts or premiums for varying quality and delivery locations. (2) In bond markets, an index (usually 100) representing the face value of a bond.

Parity: Par Rate.

Path Dependent Option: An option whose valuation and payoff depends on the realized price path of the underlying asset, such as an Asian option or a Lookback option.

Pay/Collect: A shorthand method of referring to the payment of a loss (pay) and receipt of a gain (collect) by a clearing member to or from a clearing organization that occurs after a futures position has been marked-to-market. See Variation Margin.

Payment-in-Kind: Refers to an alternative to cash payments to producers of various commodities under the U.S. Department of Agriculture acreage control program authorized by Congress in 1985. The payments consisted of generic certificates which could be exchanged for commodities held in government warehouses or redeemed for equivalent monetary value.

Pegged: A system where a currency moves in line with another currency, some pegs are strict while others have bands of movement.

Pegged Price: The price at which a commodity has been fixed by agreement.

Pegging: Effecting commodity transactions to prevent a decline in the price of the commodity so that previously written put options will expire worthless, thus protecting premiums previously received.

Performance Bond: See Margin

Pip:The smallest increment of change in a foreign currency price, either up or down.

Pit: A specially constructed arena on the trading floor of some exchanges where trading in futures is conducted. On other exchanges the term "ring" designates the trading area for a futures. The area is described as a “pit” because it is octagonal with steps descending into the center. Traders stand on the various steps, which designate the contract month, or as in the case of the S&P 500, the number of contracts being traded. See Ring.

Pit Brokers: See Floor Broker.

Point: A measure of price change equal to 1/100 of one cent in most futures traded in decimal units. In grains, it is of one cent; in T-bonds, it is one percent of par. See Tick.

Point-And-Figure: A method of charting which uses prices to form patterns of movement without regard to time. It defines a price trend as a continued movement in one direction until a reversal of a predetermined criterion is met.

Point Balance: A statement prepared by futures commission merchants to show profit or loss on all open contracts by computing them to an official closing or settlement price, usually at calendar month end.

Political Risk: Exposure to changes in governmental policy which will have an adverse effect on an investor's position.

Pork Bellies: One of the major cuts of the hog carcass that, when cured, becomes bacon.

Portfolio: The group of investments held by an investor.

Portfolio Insurance: A trading strategy which attempts to alter the nature of price changes in a portfolio to substantially reduce the likelihood of returns below some predetermined level for an established period of time. This can be achieved by moving assets among stocks, cash and fixed-income securities or, with the advent of stock index futures contracts, by hedging a stock-only portfolio by selling stock index futures in a declining market or purchasing futures in a rising market. The objective is to create an exposure similar to that of a stock portfolio with a protective purchased put option.

Position: An interest in the market, either long or short, in the form of one or more open contracts. Also, "in position" refers to a commodity located where it can readily be moved to another point or delivered on a futures contract. Commodities not so situated are "out of position." Soybeans in Mississippi are out of position for delivery in Chicago, but in position for export shipment from the Gulf.

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 position, either net long or net short, in one futures (or option) or in all futures (or options) of one commodity or financial instrument combined which may be held or controlled by one person as prescribed by an exchange and/or by the CFTC.

Position Trader: A futures trader who either buys or sells contracts, and holds them for an extended period of time, as distinguished from the day trader, who will normally initiate and offset a futures position within a single trading session.

Positive Carry: The cost of financing a financial instrument (the short-term rate of interest), where the cost is less than the current return of the financial instrument. See Carrying Charges and Negative Carry.

Posted Price: An announced or advertised price indicating what a firm will pay for a commodity or the price at which the firm will sell it.

Prearranged Trading: Trading between brokers in accordance with an expressed or implied agreement or understanding, which is a violation of the Commodity Exchange Act and CFTC regulations.

Premium: (1) the amount a price would be increased to purchase a better quality commodity; (2) refers to a futures delivery month selling at a higher price than another, as "July is at a premium over May;" (3) cash prices that are above the futures price, such as in foreign exchanges. If the forward rate for Italian lira is at a premium to spot lira, it is selling above the spot price. See Contango, Discount; (4) the money, securities or property the buyer pays to the writer for granting an option contract.; (5) The price paid to purchase an option. This is also the money received when an option is written (sold).

Price:The price at which the underlying currency can be bought or sold.

Price Basing: A situation where producers, processors, merchants or consumers of a commodity establish commercial transaction prices based on the futures prices for that or a related commodity (e.g., an offer to sell corn at 5 cents over the December futures price). This phenomenon is commonly observed in grain and metal markets.

Price Discovery: The process of determining the price level for a commodity or financial instrument based on supply and demand factors.

Price Manipulation: Any planned operation, transaction or practice calculated to cause or maintain an artificial price.

Price Movement Limit: See Limit (Up or Down).

Price Transparency:The ability of all market participants to "see" or deal at the same price.

Price Weighted Index: A stock index weighted by adding the price of one share of each stock included in the index, and dividing this sum by a constant divisor. The divisor is changed when a stock split or stock dividend occurs because these affect the stock prices.

Primary Dealer: A designation given by the Federal Reserve System to commercial banks or brokers/dealers who meet specific criteria. Among the criteria are capital requirements and meaningful participation in the Treasury auctions.

Primary Market: (1) For producers, their major purchaser of commodities; (2) in commercial marketing channels, an important center at which spot commodities are concentrated for shipment to terminal markets; and (3) to processors, the market that is the major supplier of their commodity needs.

Prime Rate - Interest rate charged by major banks to their most creditworthy customers.    

Principals' Market: A market where the ring dealing members act as principals for the transactions they conclude across the ring and with their clients.

Principal Value:The original amount invested by the client.

Privileges: See Option.

Profit /Loss or "P/L" or Gain/Loss: The actual "realized" gain or loss resulting fromtrading activities on Closed Positions, plus the theoretical "unrealized" gain or loss on Open Positions that have been Mark-to-Market.

Program Trading: The purchase (or sale) of a large number of stocks contained in or comprising a portfolio. Originally called "program" trading when index funds and other institutional investors began to embark on large-scale buying or selling campaigns or "programs" to invest in a manner which replicated a target stock index, the term now also commonly includes computer aided stock market buying or selling programs, portfolio insurance, and index arbitrage.

Prompt Date: The date on which the buyer of an option will buy or sell the underlying commodity (or futures contract) if the option is exercised.

Public: In trade parlance, non-professional speculators as distinguished from hedgers and professional speculators or traders.

Public Elevators: Grain elevators in which bulk storage of grain is provided for the public for a fee. Grain of the same grade but owned by different persons is usually mixed or commingled as opposed to storing it "identity preserved." Some elevators are approved by exchanges as "regular" for delivery on futures contracts.

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.

Purchase and Sale Statement: See P&S.

Puts: Option contracts which give the holder the right but not the obligation to sell a specified quantity of a particular commodity, financial instrument, or other interest at a given price (the "strike price") prior to or on a future date. Also called "put option," they will have a higher (lower) value the lower (higher) the current market value of the underlying article is relative to the strike price.

Put Option: An option to sell a specified amount of an underlying commodity or financial instrument at an agreed price and time at any time until the expiration of the option. A put option is purchased to protect against a fall in price. The buyer pays a premium to the seller/grantor of this option. The buyer has the right to sell the underlying commodity or financial instrument or enter into a short position in the futures market if the option is exercised. A put is purchased in expectation of lower prices. If prices are expected to rise, a put may be sold. Also see Call Option.

Pyramiding: The use of profits on existing positions as margin to increase the size of the position, normally in successively smaller increments.

 

 

 

Q

Quick Order: See Fill or Kill Order.

Quotation: The actual price or the bid or ask price of either cash commodities or futures contracts.

Rally: An upward movement of prices. Same as Recovery.

Random Walk: An economic theory that price movements in the futures markets and in the securities markets are completely random in character (i.e., past prices are not a reliable indicator of future prices).

Range: The difference between the high and low price of a commodity or a futures contract during a given period.

Rate:Price at which a currency can be purchased or sold against another currency.

Ratio Hedge: The number of options compared to the number of futures contracts bought or sold in order to establish a hedge that is risk neutral.

Ratio Spread: This strategy, which applies to both puts and calls, involves buying or selling options at one strike price in greater number than those bought or sold at another strike price.

Ratio Writing: When an investor writes more than one option to hedge an underlying futures contract. These options usually are written for different delivery months. Ratio writing expands the profit potential of the investor’s option position. Example: A trader would be ratio writing if he is long one September Silver contract and he writes (sells) two silver calls, one for December Delivery, the other for September.

Reaction: The downward price movement tendency of a commodity or futures contract after a price advance.

Reciprocal currency: A currency that is normally quoted as dollars per unit of currency rather than the normal quote method of units of currency per dollar. Sterling is the most common example.

Recovery: An upward price movement after a decline. Same as Rally.

Registered Commodity Representative (RCR): A person registered with the exchange(s) and the CFTC, who is responsible for soliciting business, “knowing” the customers, collecting margin, submitting orders, and recommending and executing trades for customers. A registered commodity representative is sometimes called a “broker” or “account executive.”

Regular Warehouse: A processing plant or warehouse that satisfies exchange requirements for financing, facilities, capacity, and location and has been approved as acceptable for delivery of commodities against futures contracts. See Licensed Warehouse.

Replicating Portfolio: A portfolio of assets for which changes in value match those of a target asset. For example, a portfolio replicating a standard option can be constructed with certain amounts of the asset underlying the option and bonds. Sometimes referred to as a Synthetic Asset.

Reporting Level: Sizes of positions set by the exchanges and/or the CFTC at or above which futures traders or brokers who carry these accounts must make daily reports about the size of the position by commodity or financial security, by delivery month, and whether the position is controlled by a commercial or non-commercial trader.

Repurchase Agreement or (Repro): 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.

Resistance: In technical trading, a price area where new selling will emerge to dampen a continued rise. Also see Support.

Resting Order: An order to buy at a price below or to sell at a price above the prevailing market that is being held by a floor broker or is resident on an electronic exchange waiting to be filled. Such orders may either be day orders or open orders.

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.

Retender: In specific circumstances, some contract markets permit holders of futures contracts who have received a delivery notice through the clearing house to sell a futures contract and return the notice to the clearinghouse to be reissued to another long; others permit transfer of notices to another buyer. In either case, the trader is said to have retendered the notice.

Retracement: A reversal within a major price trend.

Revaluation:Daily calculation of potential profits or losses on open positions based on the difference between the settlement price of the previous trading day and the current trading day.

Revaluation rate: The rate for any period or currency which is used to revalue a position or book.

Reversal: A change of direction in prices. Also, for a person short the physical and long synthetic futures, borrowing to purchase the physical and shorting futures. This takes advantage of low interest rates and allows him to make delivery if necessary.

Reversal Stop Order: An order that not only offsets your current futures position (long or short), but actually enters you in that market on the opposite side.

Reverse Conversion: With regard to options, a position created by buying a call option, selling a put option, and selling the underlying futures contract.

Reverse Crush Spread: The sale of soybean futures and the simultaneous purchase of soybean oil and meal futures. See Crush Spread.

Riding the Yield Curve: Trading in an interest rate futures according to the expectations of change in the yield curve.

Ring: A circular area on the trading floor of an exchange where traders and brokers stand while executing futures trades. Some exchanges use pits rather than rings. See Pit.

Risk (Foreign Exchange Risk):The risk that the exchange rate on a foreign currency will move against the position held by an investor such that the value of the investment is reduced.

Risk Factor: See Delta Value.

Risk Management:The employment of financial analysis and use of trading techniques to reduce and/or control exposure to financial risk.

Risk Position: An asset or liability, which is exposed to fluctuations in value through changes in exchange rates or interest rates.

Risk/Reward Ratio: The relationship between the probability of loss and profit. This ratio is often used as a basis for trade selection or comparison.

Roll-Over: A trading procedure involving the shift of one month of a straddle into another future month while holding the other contract month. The shift can take place in either the long or short straddle month. The term also applies to lifting a near futures position and re-establishing it in a more deferred delivery month.

Round Lot: A quantity of the underlying equal in size to the corresponding futures contract for the underlying. See Even Lot.

Round Trip: Buying and selling of a specified amount of currency.

Round Turn: A completed transaction involving both a purchase and a liquidating sale, or a sale followed by a covering purchase.

Rules: The principles for governing an exchange. In some exchanges, rules are adopted by a vote of the membership, while regulations can be imposed by the governing board.

Runners: Messengers who rush orders received by phone clerks to brokers
for execution in the pit.Back to Top

 

 

 

S

Sample Grade: In commodities, usually the lowest quality of a commodity, too low to be acceptable for delivery in satisfaction of futures contracts.

Scale Down (or Up): To purchase or sell a scale down means to buy or sell at regular price intervals in a declining market. To buy or sell on scale up means to buy or sell at regular price intervals as the market advances.

Scalper: A speculator using live data on a fully electronic trading exchange or a trader on the trading floor of an exchange who buys and sells rapidly to take advantage of small price fluctuations, holding positions for only a short time during a trading session. Typically, a scalper will stand ready to buy at a fraction below the last transaction price and to sell at a fraction above, thus creating market liquidity. Scalpers buy and sell often; therefore, they make it possible for others to enter or exit the market quickly. The term scalper arises from the fact that these traders attempt to “scalp” a small amount on a trade.

Scalping: The practice of trading in and out of the market on very small price fluctuations. A person who engages in this practice is known as a scalper.

Secondary Market: Market where previously issued securities are bought and sold.

Security: Common or preferred stock; a bond corporation, government, or quasi-government body.

Security Deposit: See Margin.

Security Deposit Call: A demand for additional cash funds because of adverse price movement. See Maintenance Margin.

Seller's Call: See Call.

Seller's Market: A condition of the market in which there is a scarcity of goods available and hence sellers can obtain better conditions of sale or higher prices. Also see Buyer's Market.

Seller's Option: The right of a seller to select, within the limits prescribed by a contract, the quality of the commodity delivered and the time and place of delivery.

Selling Hedge (or Short Hedge): Selling futures contracts to protect against possible decreased prices of commodities. Also see Hedging.

Selling Rate: Rate at which a bank is willing to sell foreign currency.

Sell Limit Order:An order to execute a transaction only at a specified price (the limit) or higher.

Series (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, having the same strike price and expiration date.

Settlement: The act of fulfilling the delivery requirements of the futures contract.

Settlement Date: The date by which an executed order must be settled by the transference of instruments or currencies and funds between buyer and seller.

Settlement or Settling Price: The daily price at which the clearing house clears all trades and settles all accounts between clearing members of each contract month. Settlement prices are used to determine both margin calls and invoice prices for deliveries. The term also refers to a price established by the exchange to even up positions which may not be able to be liquidated in regular trading.

Settlement Risk: Risk associated with the non settlement of the transaction by the counter party.

Sharpe Ratio: A measurement of trading performance calculated as the average return divided by the variance of those returns; named after William P. Sharpe.

Shipping Certificate: A negotiable instrument used by several futures exchanges as the futures delivery instrument for several commodities (e.g., soybean meal and white wheat). The shipping certificate is issued by exchange-approved facilities and represents a commitment by the facility to deliver the commodity to the holder of the certificate under the terms specified therein. Unlike an issuer of a warehouse receipt who has physical product in store, the issuer of a shipping certificate may honor its obligation from current production or through-put as well as from inventories.

Shock Absorber: A temporary restriction in the trading of stock index futures which becomes effective following a significant intraday decrease in stock index futures prices. Designed to provide an adjustment period to digest new market information, the restriction bars trading below a specified price level. Shock Absorbers are generally market specific and at tighter levels than circuit breakers.

Short: (1) The selling side of an open futures contract. This sale is a legally enforceable agreement to make delivery of a specific quantity and grade of a particular futures during a specified delivery period; (2) a trader whose net position in the futures market shows an excess of open sales over open purchases. (3) A person who has sold a contract short. See Long.

Short Covering: See Cover.

Short Hedge: See Selling Hedge.

Short Selling: Selling a futures contract with the idea of delivering on it or offsetting it at a later date.

Short Squeeze: See Squeeze.

Short-term Interest Rates: Normally the 90 day rate.

Short the Basis: The purchase of futures as a hedge against a commitment to sell in the cash or spot markets. When a person or firm need to buy a commodity in the future, they can protect themselves against price increases by making a substitute purchase in the futures market. The risk this person now faces is the risk of a change in basis (cash price – futures price). The hedger is said to be short-the-basis because he will profit if the basis becomes more negative (weaker); For example, if a hedger buys a soybean futures contract a 525 when cash soybeans are 512, the basis is minus. 13. If this hedge is lifted with futures at 520 and cash at 500, the basis is minus .20, and the hedger has profited by the $.07 decrease in the basis. See Hedging.

Sidelined: A major currency that is lightly traded due to major market interest being in another currency pair.

Slippage:It's the experience of not getting filled at (or even very close to…) your expected price when you place a market order or stop loss. This can happen because either: market price is simply moving too fast, the market is not liquid or you're talking to an unmotivated broker.

Small Traders: Traders who hold or control positions in futures or options that are below the reporting level specified by the exchange or the CFTC.

Soft: A description of a price which is gradually weakening. Also refers to commodities such as sugar, cocoa, and coffee.

Soften: The process of a slowly declining market price.

Sold-Out-Market: When liquidation of a weakly-held position has been completed, and offerings become scarce, the market is said to be sold out.

Specialist System: A type of trading commonly used for the exchange trading of securities in which one individual or firm acts as a market-maker in a particular security, with the obligation to see that trading in that security is fair and orderly by offsetting temporary imbalances in supply and demand by trading for his own account. Also see Board Broker System and Free Crowd System.

Speculation: An attempt to profit from futures price changes through the purchase or sale of futures contracts. In the process, the speculator assumes the risk that the hedger is transferring, and provides liquidity in the market.

Speculative Bubble: A rapid, but usually short-lived, run-up in prices caused by excessive buying which is unrelated to any of the basic, underlying factors affecting the supply or demand for the commodity or financial instrument. Speculative bubbles are usually associated with a "bandwagon" effect in which speculators rush to buy the commodity or financial instrument(in the case of futures, "to take positions") before the price trend ends, and an even greater rush to sell the commodity or financial instrument (unwind positions) when prices reverse.

Speculative Limit: See Position Limit.

Speculative Position Limit: See Position Limit.

Speculator: In futures, an individual who does not hedge, but who trades with the objective of achieving profits through the successful anticipation of price movements.

Split Close: Term which refers to price differences in transactions at the close of any market session.

Spot: (1) Market of immediate delivery of the product and immediate payment. (2) The cash market price of a specific futures. (3) Also refers to a maturing delivery month of a futures contract.

Spot Commodity: (1) The actual commodity as distinguished from a futures contract: (2) sometimes used to refer to cash commodities available for immediate delivery. Also see Actuals or Cash Commodity.

Spot Delivery: Immediate delivery.

Spot Market:Market where people buy and sell actual financial instruments (currencies) for two-day delivery.

Spot Month: See Current Delivery Month.

Spot/Next or S/N roll: The process of moving the spot settlement value date on an open position forward to the next valid value date. This process will affect the profit or loss on the overnight position. The forward points reflect the difference in interest rates between the currencies being rolled over.

Spot Price: The price at which a physical commodity for immediate delivery is selling at a given time and place. See Cash Price.

Spread (or Straddle): The purchase of one futures delivery month against the sale of another futures delivery month of the same commodity (or financial security); the purchase of one delivery month of one commodity (or financial security) against the sale of that same delivery month of a different commodity (or financial security); or the purchase of one commodity ( or financial security) in one market against the sale of the commodity (or financial security) in another market, to take advantage of a profit from a change in price relationships. See also Arbitrage, Switch. The term spread is also used to refer to the difference between the price of a futures month and the price of another month of the same commodity (or financial instrument). A spread can also apply to options.

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.

Square: Purchase and sales are in balance and thus the dealer has no open position.

Squawk Box: A speaker connected to a phone often used in broker trading desks.

Squeeze: A market situation in which the lack of supplies tends to force shorts to cover their positions by offset at higher prices.

SRO: See Designated Self-Regulatory Organization.

Stable market: An active market which can absorb large sale or purchases of currency without major moves.

Standby Commitment: A put option in Ginnie Mae trading which gives the holder the right, but not the obligation, to make delivery.

Steer/Corn Ratio: See Feed Ratio.

Sterilization: Central Bank activity in the domestic money market to reduce the impact on money supply of its intervention activities in the FX market.

Sterling:Another term for the British currency, 'The Pound'.

Stock Index Futures: Based on stock market indexes, including Standard and Poor’s 500, Value Line, NYSE Composite, the Dow Jones Industrial Average, and the Nikkei 22 Index, these instruments are used by investors concerned with price changes in a large number of stocks or with major long-term trends in the stock market indexes.

Stocky: Market slang for Swedish Krona.

Stop-Close-Only Order: A stop order which can only be executed, if possible, during the closing period of the market. See also Market-on-Close Order.

Stop Limit Order: A stop limit order is an order that goes into force as soon as there is a trade at the specified price. The order, however, can only be filled at the stop limit price or better.

Stop-Loss Order: A price order to exit a market at a specified price. A Stop-Loss order will always be an order to do the opposite of an open position. If you are long (bought) you place a stop-loss order to sell. If you are short (sold) you place a stop-loss order to buy.

Stop Order: This is an order that becomes a market order when a particular price level is reached. A sell stop is placed below the market, a buy stop is placed above the market. Sometimes referred to as Stop Loss Order. Stop orders are also used to initiate positions. A buy stop order is activated by a bid or trade at or above the stop price. A sell order is triggered by a trade or offer at or below the stop price.

Straddle: See Spread.

Strangle: An option position consisting of the purchase or sale of put and call options having the same expiration but different strike prices.

Street Book: A daily record kept by futures commission merchants and clearing members showing details of each futures transaction, including date, price, quantity, market, commodity, futures, and the person for whom the trade was made.

Striking (Strike) Price (Exercise or Contract Price): The price, specified in the option contract, at which the underlying futures contract or commodity (or financial instrument) will move from seller to buyer.

STRIPS: Separate Trading of Registered Interest and Principal Securities. A book-entry system operated by the Federal Reserve permitting separate trading and ownership of the principal and coupon portions of selected Treasury securities. It allows the creation of zero coupon Treasury securities from designated whole bonds.

Strong Hands: When used in connection with delivery of commodities on futures contracts, the term usually means that the party receiving the delivery notice probably will take delivery and retain ownership of the commodity; when used in connection with futures positions, the term usually means positions held by trade interests or well-financed speculators.

Support: In technical analysis, a price area where new buying is likely to come in and stem any decline. Also see Resistance.

Swap: In general, the exchange of one asset or liability for a similar asset or liability for the purpose of lengthening or shortening maturities, or raising or lowering coupon rates, to maximize revenue or minimize financing costs. In securities, this may entail selling one issue and buying another in foreign currency, it may entail buying a currency on the spot market and simultaneously selling it forward. Swaps may also involve exchanging income flows; for example, exchanging the fixed rate coupon stream of a bond for a variable rate payment stream, or vice versa, while not swapping the principal component of the bond.

Swap Price: A price as a differential between two dates of the swap.

Swaption: An option to enter into a swap -- i.e., the right, but not the obligation, to enter into a specified type of swap at a specified future date.

Swissy: Market slang for Swiss Franc.

Switch: Offsetting a position in one delivery month of a commodity or financial instrument and simultaneous initiation of a similar position in another delivery month of the same commodity or financial instrument, a tactic referred to as "rolling forward." See Arbitrage.

Synthetic Futures: A position created by combining call and put options. A synthetic long futures position is created by combining a long call option and a short put option for the same expiration date and the same strike price. A synthetic short futures is created by combining a long put and a short call with the same expiration date and the same strike price. Synthetic positions are a form of arbitrage and are similar to but not exactly the same as an outright futures position.

Systemic Risk: Market risk due to price fluctuations which cannot be eliminated by diversification.

 

 

 

T

Take Profit Order: A customer's instructions to buy or sell a currency pair which, when executed, will result in the reduction in the size of the existing position and show a profit on said position.

Taker: The buyer of an option contract.

T-Bond: See Treasury Bond.

Technical Analysis: An approach to forecasting commodity or futures prices which examines patterns of price change, rates of change, and changes in volume of trading and open interest, without regard to underlying fundamental market factors. Someone who follow technical rules (called a technician) believes that futures market prices will anticipate any changes in fundamentals.

Technical Correction: An adjustment to price not based on market sentiment but technical factors such as volume and charting.

Technical Rally: A price movement attributed to conditions developing
from withing the futures market itself. These conditions include changes
in open interest, volume and extent of recent price movement.

Ted Spread: The difference between the price of the three-month U.S. Treasury bill futures contract and the price of the three-month Eurodollar time deposit futures contract with the same expiration month.

Tender: To give notice to the clearinghouse of the intention to initiate delivery of the physical commodity in satisfaction of the futures contract. Also see Retender.

Tenderable Grades: See Contract Grades.

Terminal Elevator: An elevator located at a point of greatest accumulation in the movement of agricultural products which stores the commodity or moves it to processors.

Terminal Market: Usually synonymous with commodity exchange or futures market, specifically in the United Kingdom.

Theta: The derivative of the option price equation with respect to the remaining time to expiration of the option. A measure of the sensitivity of the value of the option to the passage of time.

Thin market: A market in which trading volume is low and in which consequently bid and ask quotes are wide and the liquidity of the instrument traded is low.

Thursday/Friday Dollars: A US foreign exchange technicality. If a foreign bank buys dollars on Tuesday for Thursday delivery. If the bank leaves the funds overnight and transfers them on Friday by means of a clearing house cheque then clearance is not until Monday, the next working day. Higher interest rates for this period are thus available.

Tick: Refers to a minimum change in price up or down. See Point.

Time Limit Order: A customer order that designates the time during which it can be executed.

Time-of-Day Order: This is an order which is to be executed at a given minute in the session. For example, "Sell 10 March corn at 12:30 p.m."

Time Spread: The selling of a nearby option and buying of a more deferred option with the same strike price.

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: That portion of an option's premium that exceeds the intrinsic value. The time value of an option reflects the probability that the option will move into-the-money. Therefore, the longer the time remaining until expiration of the option, the greater its time value. Also called Extrinsic Value.

To-Arrive Contract: A transaction providing for subsequent delivery within a stipulated time limit of a specific grade of a commodity.

Today/Tomorrow: Simultaneous buying of a currency for delivery the following day and selling for the spot day, or vice versa. Also referred to as overnight.

Tomorrow Next (Tom/Next), (T/N), T/N Roll:The process of moving the settlement value date on an open position forward from one business day after the trade date (tomorrow), to the next valid value date (next), the spot value date.

Tradeable amount: Smallest transaction size acceptable.

Trade Balance: The difference between a nation's imports and exports of
merchandise.

Trade Option: A commodity option transaction in which the taker is reasonably believed by the writer to be engaged in business involving use of that commodity or a related commodity.

Trader: (1) A merchant involved in cash commodities; (2) a professional speculator who trades for his own account.

Trailing Stop: A stop-loss order that follows the prevailing price trend.

Transaction: The entry or liquidation of a trade.

Transaction Cost: The cost of buying or selling a financial instrument.

Transaction Date: The date on which a trade occurs.

Transfer Trades: Entries made upon the books of futures commission merchants for the purpose of: (1) transferring existing trades from one account to another within the same office where no change in ownership is involved; (2) transferring existing trades from the books of one commission merchant to the books of another commission merchant where no change in ownership is involved. Also called Ex-Pit Transactions.

Transferable Option (or Contract): A contract which permits a position in the option market to be offset by a transaction on the opposite side of the market in the same contract.

Transfer Notice: A term used on some exchanges to describe a notice of delivery. See Retender.

Treasury Bills: Short-term U.S. government obligations, generally issued with 13, 26 or 52-week maturities. T-Bills are a fixed income asset and issued at discount.

Treasury Bonds (or T-Bond): Long-term obligations of the U.S. government with maturities of more than 7 years, which pay interest semiannually until they mature or are called, at which time the principal and the final interest payment is paid to the investor.

Treasury Notes: Same as Treasury Bonds except that Treasury Notes are medium-term and not callable.

Trend: The general direction, either upward or downward, in which prices have been moving.

Trendline: In charting, a line drawn across the bottom or top of a price chart indicating the direction or trend of price movement. If up, the trendline is called bullish; if down, it is called bearish.

Turnover:The total volume of all executed transactions in a given time period.

Two Tier Market: A dual exchange rate system where normally only one rate is open to market pressure, e.g. South Africa.

Two-Way Price: A quote in the foreign exchange market that indicates a bid and an offer.

Two-Way Quotation: When a dealer quotes both buying and selling rates for foreign exchange transactions.

 

 

 

U

Uncovered: Another term for an open position.

Underlying (Underlying Commodity): The commodity, instrument, or futures contract on which a futures option is based, and which must be accepted or delivered if the option is exercised. Also, the cash commodity or financial instrument underlying a futures contract.

Under-valuation: An exchange rate is normally considered to be undervalued when it is below its purchasing power parity.

Unrealized Gain/Loss: The theoretical gain or loss on Open Positions valued at current market rates, as determined by the broker in its sole discretion. Unrealized Gains' Losses become Profits/Losses when position is closed.

Underlying Instrument: The contract or commodity that a call option purchaser has the right to buy, or put option purchaser has the right to sell.

Uptick: A new price quote at a price higher than the preceding quote.

Uptick Rule: In the U.S., a regulation whereby a security may not be sold short unless the last trade prior to the short sale was at a price lower than the price at which the short sale is executed.

US Prime Rate: The interest rate at which US banks will lend to their prime corporate customers.

U.S. Treasury: The United States Department of the Treasury is the government department responsible for issuing all Treasury bonds, notes, and bills.

 

 

V

Value Date: The maturity date of the currency for settlement, usually two business days (one day for Canada) after the trade has occurred.

Value Spot: Normally settlement for two working days from today. See value date.

Variable Limit (Variable Price Limit): A price limit schedule, determined by an exchange, that permits variations above or below the normally allowable price movement for any one trading day. Most exchanges set limits on the maximum daily price movement of some of the futures contracts trade at their exchange. They also retain the right to expand these limits if the price moves up or down the limit in one direction for two or there trading days in a row. If the limits automatically change after repeated limit moves, they are known as variable limits.

Variation Margin: Payment made on a daily or intraday basis by a clearing member to the clearing organization based on adverse price movement in positions carried by the clearing member, calculated separately for customer and proprietary positions.

Variation Margin Call: A margin call from the clearinghouse to a clearing member. These margin calls are issued when the clearing member’s margin has been reduced substantially by unfavorable price movements. The variation margin call must be met within one hour.

Vault Receipt: A document indicating ownership of a commodity stored in a bank or other depository and frequently used as a delivery instrument in precious metal futures contracts.

Versus Cash: See Exchange of Futures for Cash .

Vertical Spread: Buying and selling puts or calls of the same expiration month but different strike prices.

Visible Supply: Usually refers to supplies of a commodity in licensed warehouses. Often includes afloats and all other supplies "in sight" in producing areas.

Volatile: A market which is often subject to wide price fluctuations is said to be volatile. This volatility is often due to a lack of liquidity. Lack of liquidity is caused by too few market participants, too little volume, or both.

Volatility Quote Trading: Refers to the quoting of bids and offers on option contracts in terms of their implied volatilities rather than as prices.

Volume of Trade: The number of contracts traded during a specified period of time. It may be quoted as the number of contracts traded or in the total of physical units, such as bales or bushels, pounds or dozens.

Vostro Account: A local currency account maintained with a bank by another bank. The term is normally applied to the counterparty's account from which funds may be paid into or withdrawn, as a result of a transaction.

 

 

 

W

Warehouse Receipt: A document certifying possession of a commodity in a licensed warehouse that is recognized for delivery purposes by a commodity futures exchange.

Warrant: An issuer-based product that gives the buyer the right, but not the obligation, to buy (in the case of a call) or to sell (in the case of a put) a stock or a commodity at a set price during a specified period.

Warrant or Warehouse Receipt for Metals: Certificate of physical deposit, which gives title to physical metal in an exchange approved warehouse.

Wash Sale: Transactions that give the appearance of purchases and sales but which are initiated without the intent to make a bona fide transaction and which generally do not result in any actual change in ownership. Such sales are prohibited by the Commodity Exchange Act.

Wash Trading: Entering into, or purporting to enter into, transactions to give the appearance that purchases and sales have been made, without resulting in a change in the trader's market position.

Weak Hands: When used in connection with delivery of commodities on futures contracts, the terms usually means that the party probably does not intend to retain ownership of the commodity; when used in connection with futures positions, the term usually means positions held by small speculators.

Whipsaw: Slang for a condition of a highly volatile market where a sharp price movement is quickly followed by a sharp reversal.

Wild Card Option: Refers to a provision of any physical delivery Treasury Bond or Note futures contract which permits shorts to wait until as late as 8:00 p.m. on any notice day to announce their intention to deliver at invoice prices that are fixed at 2:00 p.m., the close of futures trading, on that day.

Winter Wheat: Wheat that is planted in the fall, lies dormant during the winter, and is harvested beginning about May of the next year.

Wire House: See Futures Commission Merchant (FCM).

Withholding Tax: Income tax withheld from employees' wages and paid directly to the government by the employer.

Working day: A day on which the banks in a currency's principal financial centre are open for business. For FX transactions, a working day only occurs if the bank in both financial centre's are open for business (all relevant currency centers in the case of a cross are open).

Writer: The issuer, grantor, or maker of an option contract.

 

 

 

XYZ

X: A Nasdaq stock symbol specifying that it is a mutual fund.

Yard: A slang word used in the currency industry meaning 'billion'.

Yield: (1) The production of a piece of land; e.g., his land yielded 100 bushels per acre. (2) The return provided by an investment.

Yield Curve: A graphic representation of market yield for a fixed income security plotted against the maturity of the security.

Yield to Maturity: The rate of return an investor receives if a fixedincome
security is held to maturity.

Z-Score: A statistical measure that quantifies the distance (measured in standard deviations) a data point is from the mean of a data set.
In a more financial sense, Z-score is the output from a credit-strength test that gauges the likelihood of bankruptcy.

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