Glossary - Dictionaey of Commodity Market Terms [A-Z]

Glossary of Commodity Market Terms [A-Z]
 

Arbitrage - The simultaneous purchase and sale of similar commodities in different markets to take advantage of a price discrepancy.

 Arbitration - The procedure of settling disputes between members, or between members and customers.

 Bar Chart - A chart that graphs the high, low, and settlement prices for a specific trading session over a given period of time.

 Basis - The difference between the current cash price and the futures price of the same commodity. Unless otherwise specified, the price of the nearby futures contract month is generally used to calculate the basis.

 Bear - Someone who thinks market prices will decline.

 Bear Market - A period of declining market prices.

 Bid - An expression indicating a desire to buy a commodity at a given price; opposite of offer.

 Broker - A company or individual that executes futures and options orders on behalf of financial and commercial institutions and/or the general public.

 Brokerage Fee - See Commission Fee.

 Brokerage House - See Futures Commission Merchant.

 Bull - Someone who thinks market prices will rise.

 Bull Market - A period of rising market prices.

 Carrying Charge - For physical commodities such as grains and metals, the cost of storage space, insurance, and finance charges incurred by holding a physical commodity. Also referred to as cost of carry or carry.

 Cash Commodity - An actual physical commodity someone is buying or selling, e.g., soybeans, palm oil, gold, silver, etc. Also referred to as actuals.

 Cash Market - A place where people buy and sell the actual commodities. Also called spot market.

 Charting - The use of charts to analyze market behavior and anticipate future price movements. Those who use charting as a trading method plot such factors as high, low, and settlement prices; average price movements; volume; and open interest. Two basic price charts are bar charts and point-and-figure charts.

 Clearing Corporation - An independent corporation that settles all trades made at an exchange acting as a guarantor for all trades cleared by it, reconciles all clearing member firm accounts each day to ensure that all gains have been credited and all losses have been collected, and sets and adjusts clearing member firm margins for changing market conditions.

 Clearing House - An agency or separate corporation of a futures exchange that is responsible for settling trading accounts, clearing trades, collecting and maintaining margin monies, regulating delivery, and reporting trading data. Clearing houses act as third parties to all futures and options contracts acting as a buyer to every clearing member seller and a seller to every clearing member buyer.

 Clearing Member - A member of an exchange clearing house. by companies. Clearing members are responsible for the financial commitments of customers that clear through their firm.

 Closing Price - See Settlement Price.

 Closing Range - A range of prices at which buy and sell transactions took place during the market close.

 Commission Fee - A fee charged by a broker for executing a transaction. Also referred to as brokerage fee.

 Commodity - An article of commerce or a product that can be used for commerce. In a narrow sense, products traded on an authorized commodity exchange. The types of commodities include agricultural products, base metals, bullion and energy products.

 Convergence - A term referring to cash and futures prices tending to come together (i.e., the basis approaches zero) as the futures contract nears expiration.

 Cost of Carry (or Carry) - See Carrying Charge.

 Daily Trading Limit - The maximum price range set by the exchange each day for a contract.

 Deferred (Delivery) Month - The more distant month(s) in which futures trading is taking place, as distinguished from the nearby (delivery) month.

 Day Traders - Speculators who take positions in futures and liquidate them prior to the close of the same trading day.

 Deliverable Grades - The standard grades of commodities or instruments listed in the rules of the exchanges that must be met when delivering cash commodities against futures contracts. Grades are often accompanied by a schedule of discounts and premiums allowable for delivery of commodities of lesser or greater quality than the standard called for by the exchange. Also referred to as contract grades.

 Delivery - The transfer of the cash commodity from the seller of a futures contract to the buyer of a futures contract. Each futures exchange has specific procedures for delivery of a cash commodity. Some futures contracts, such as stock index contracts, are cash settled.

 Delivery Month - A specific month in which delivery may take place under the terms of a futures contract. Also referred to as contract month.

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

 Expiration Date - Options on futures generally expire on a specific date during the month preceding the futures contract.

 Full Carrying Charge Market - A futures market where the price difference between delivery months reflects the total costs of interest, insurance, and storage.

 Fundamental Analysis - A method of anticipating future price movement using supply and demand information.

 Futures Contract - A legally binding agreement, made on the trading floor of a futures exchange, to buy or sell a commodity or financial instrument sometime in the future. Futures contracts are standardized according to the quality, quantity, and delivery time and location for each commodity. The only variable is price, which is discovered on an exchange-trading floor.

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

 Hedger - An individual or company owning or planning to own a cash commodity such as gold, soybeans, silver, etc. and concerned that the cost of the commodity may change. While holding it a hedger achieves protection against changing cash prices by purchasing (selling) futures contracts of the same or similar commodity.

 Hedging - The practice of offsetting the price risk inherent in any cash market position by taking an equal but opposite position in the futures market. Hedgers use the futures markets to protect their businesses from adverse price changes. See Selling (Short) Hedge and Purchasing (Long) Hedge.

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

 Initial Margin - The amount a futures market participant must deposit into his margin account at the time he places an order to buy (sell) a futures contract.

 Inverted Market - A futures market in which the more distant the contract month, the lower is the futures price.

 Liquidate - Selling (or purchasing) futures contracts of the same delivery month purchased (or sold) during an earlier transaction or making (or taking) delivery of the cash commodity represented by the futures contract. See Offset.

 Long - One who has bought futures contracts or owns a cash commodity.

 Long Hedge - Buying futures contracts to protect against a possible price increase of cash commodities that will be purchased in the future. At the time the cash commodities are bought, selling an equal number and type of futures contracts as those that were initially purchased closes the open futures position.

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

 Maintenance Margin - A set minimum margin (per outstanding futures contract) that a customer must maintain in his margin account.

 Margin Call - A call from a clearing house to a clearing member, or from a brokerage firm to a customer, to bring margin deposits up to a required minimum level.

 Market Order - An order to buy or sell a futures contract of a given delivery month to be filled at the best possible price and as soon as possible.

 Marking-to-Market - To debit or credit on a daily basis a margin account based on the close of that day's trading session. In this way, buyers and sellers are protected against the possibility of contract default.

 Nearby (Delivery) Month - The futures contract month closest to expiration. Also referred to as spot month.

 Offer - An expression indicating one's desire to sell a commodity at a given price; opposite of bid.

 Offset - Taking a second futures position opposite to the initial or opening position. See Liquidate.

 Open Interest - The total number of futures contracts of a given commodity that have not yet been offset by an opposite futures transaction nor fulfilled by delivery of the commodity or option exercise. Each open transaction has a buyer and a seller, but for calculation of open interest, only one side of the contract is counted.

 Position - A market commitment. A buyer of a futures contract is said to have a long position and, conversely, a seller of futures contracts is said to have a short position.

 Price Discovery - The generation of information about "future" cash market prices through the futures markets.

 Price Limit - The maximum advance or decline from the previous day's settlement price permitted for a contract in one trading session by the rules of the exchange.

 Settlement Close Out Price - The last price paid for a commodity on any trading day. The exchange clearing house determines a firm's net gains or losses, margin requirements, and the next day's price limits, based on each futures and options contract settlement price. If there is a closing range of prices, the settlement close out price is determined by averaging those prices.

 Short - One who has sold futures contracts or plans to purchase a cash commodity. Selling futures contracts or initiating a cash forward contract sale without offsetting a particular market position.

 Short Hedge - Selling futures contracts to protect against possible declining prices of commodities that will be sold in the future. At the time the cash commodities are sold, purchasing an equal number and type of futures contracts as those that were initially sold closes the open futures position.

 Speculator - A market participant who tries to profit from buying and selling futures and options contracts by anticipating future price movements. Speculators assume market price risk and add liquidity and capital to the futures markets.

 Spot - Usually refers to a cash market price for a physical commodity that is available for immediate delivery.

 Spread - The price difference between two related markets or commodities or between contracts of different maturities of same commodity.

 Volatility - A measure of the change in price over a given time period. It is often expressed as a percentage and computed as the annualized standard deviation of percentage change in daily price.

 Volume - The number of purchases or sales of a commodity futures contract made during a specified period of time, often the total transactions for one trading day.

 Warehouse Receipt - Document guaranteeing the existence and availability of a given quantity and quality of a commodity in storage; commonly used as the instrument of transfer of ownership in both cash and futures transactions.