Does not apply to bonafide hedgers.
Premium
Above par. Used to quote one price in referenceto another. In foreign exchange, above spot. Ifthe forward rate for Italian lira is at a premium tospot lira, it is selling above the spot price. SeeDiscount.
Primary Market
Important distribution centers at which spotcommodities are originally accumulated forshipment into commercial channels.
348
Glossary of Commodity Futures Terms
Prime Rate
The interest rate charged by banks to theirbiggest and most creditworthy customers. Otherinterest rates are scaled up from the prime rate. Itis a good indication of general interest rate levelswithin a country.
Put
An option to sell a commodity or security at apredetermined price within a specified period oftime.
Pyramiding
Using the profits on a previously establishedposition as margin for adding to that position.
Rally
An upward movement of prices following adecline.
Range
The high and low prices recorded during a specified time.
Reaction
A decline in prices following an advance—theopposite of rally.
Reciprocal
Any number divided into “1.” A number multiplied by its reciprocal equals one. In foreignexchange, it is a handy way of expressing currency prices in terms of each other. For example,if one British pound = $2,6057, then $1 =1/2.6057 = .3838 pounds.
Recovery
Usually describes a price advance following adecline.
Registered Representative
See Customer’s Man.
Regulated Commodities
Those commodities over which the CFTC exercises regulatory supervision for the purpose ofseeing that trading is conducted in the public’sinterest.
349
Glossary of Commodity Futures Terms
Roundturn
The purchase and sale of a contract. The long orshort position of an individual is offset by anopposite transaction or by accepting or makingdelivery of the actual commodity.
Reserves (Official)
Official foreign exchange reserves are kept toinsure a government’s ability to meet current ornear-term claims. The primary reserve currenciesare the U.S. dollar, the German deutschemark,and the Japanese yen. Gold is used in officialreserves. As long as reserves grow faster thancurrent claims, their adequacy increases. Whenclaims grow faster, reserve adequacy decreases.Therefore, a particular volume of reserves haslittle significance because the “adequacy” concept is a relative one. Official reserves are a debtentry on a country’s balance of payments; i.e.,they are an asset.
Revaluation
A formal “official” increase in the exchange rateor price of currency.
Scalp
To trade for small gains. Involves establishingand liquidating a position quickly, within thesame day or sometimes the same hour.
Security Deposit
On the IMM, the amount of funds that must bedeposited by a customer with his or her brokerfor each futures contract as a guarantee of fulfillment of the contract. It is not considered as partpayment of purchase. Used interchangeably withMargin.
Security Deposit Call
A demand for additional cash funds because ofadverse price movement. See MaintenanceSecurity Deposit.
Seller’s Option
Refers to the seller’s right to select from amonga range of alternatives regarding quality of thecommodity, time, and place of delivery.
350
Glossary of Commodity Futures Terms
Settling Price
The daily price at which the clearinghouse clearsall trades and settles all accounts between clearing members for each contract month.Settlement prices are used to determine bothmargin calls and invoice prices for deliveries.
Short
One who has sold a futures contract to establisha market position and who has not yet closed outhis or her position through an offsetting purchaseor delivery. The opposite of being long. SeeLong.
Short the Basis
The forward sale of a cash commodity hedgedby the purchase of a future against the cash position. Synonymous with Long Hedge.
Short Hedge
The sale of futures contracts to reduce the possible decline in value of an approximately equalamount of the actual commodity held.
Short Selling
Selling a contract with the idea of buying it backat a later date.
Short Squeeze
A situation in which a lack of supplies tends toforce those who have sold to cover their positions by offset in the futures market rather thanby delivery.
Sold-Out Market
Market situation in which liquidation of weaklyheld positions has been completed and offeringshave become scarce.
Speculation
Any investment that aims at profit through pricefluctuation. It is the assumption of an existingrisk in expectation of a profit.
Speculator
One who attempts to anticipate price changesand through market activities make profits; oneis not using the futures market in connectionwith the production, processing, marketing, orhandling of a product.
351
Glossary of Commodity Futures Terms
Spot
Market of immediate delivery of the product andimmediate payment. Also refers to the nearestdelivery month on a futures contract.
Spread
1. Difference in the prices of a currency betweenvarious future deliveries, or between the spotmarket and a future delivery. 2. To take a simultaneous long and short position, aimed at a profitvia fluctuation of differential in two prices. Forexample, the purchase of May corn and the saleof September corn if it is felt the difference inprice between the two would widen (if May wereat a premium to September). If it is felt that theprice difference will narrow, you would sell Mayand buy September. Also sometimes called aStraddle.
Stop-Loss Order
An order which immediately becomes a marketorder when the “stop” level is reached. Its purpose is to limit losses. It may be either a buyingorder or a selling order. For example: “Sell twoDecember British pounds at $2.6000 Stop” indicates that the buyer has bought two contracts at aprice higher than $2.6000 and wants to limit theloss to that amount. An order to buy or sell at themarket when a definite price is reached eitherabove or below the prevailing price when theorder is given.
Straddle
In futures trading, the same as Spread. Straddlesare between delivery months.
Surplus
Excess. In reference to balance of payments,income exceeds total payment to foreigners.
Swap
An interest rate swap is an agreement betweentwo parties to exchange interest payments on afixed (notional) amount of debt. In its standard(generic) form, one party to the swap agrees topay a fixed interest rate in exchange for receiving a variable (floating) rate on the swap’s
352
Glossary of Commodity Futures Terms
notional amount. The reverse position is takenby the counterparty. Typically, the floating rateside of the swap is tied to a three- or six-monthLIBOR (London Interbank Offer Rate). In foreign exchange, an exchange of bank balances.For example, when a bank sells Swiss francs forU.S. dollars, the actual funds are not shippedboth ways across the Atlantic Ocean. Instead, theU.S. bank and a correspondent bank inSwitzerland, via a swap agreement, exchange afranc balance in the Swiss bank for a dollar balance in the U.S. bank.Switching
Liquidating an existing position and simultaneously reinstating that position in another contractmonth of the same commodity or currency.
Technical Rally
A price movement attributed to conditions developing from within the futures market itself.These conditions include changes in open interest, volume, and extent of recent price movement.
Tender
Delivery against futures.
Tick
See Point. Refers to minimum change in price.
“To-Arrive” Contract
A transaction providing for subsequent deliverywithin a stipulated time limit of a specified gradeof a commodity. In reality, the “to-arrive” salescontract was the forerunner of the present-dayfutures contract.
Trade Balance
The net amount of goods exported and imported.Does not include import and export services,capital flows, or official settlements.
Treasury Bills
Government debt obligations. They are sold atsomething less than their value at maturity, thedifference thereby being the yield. For example,a one-year U.S. Treasury Bill worth $10,000 at
353
Glossary of Commodity Futures Terms
maturity may sell at $9,600. The $400 differencewould be the yield, which is 4.17 percent(400/$9,600). They are considered a goodbarometer of interest rates.Trend
The general direction of the market.
Visible Supply
Usually refers to supplies of a commodity inlicensed warehouses. Often includes afloats andall other supplies “in sight’ in producing areas.
Volume
The number of purchases or sales of a commodity futures contract made during a specified period of time.
Wire House
A firm operating a private wire to its own branchoffices, or to other firms’ commission houses; abrokerage house.
354
Index
AAbsolute risk, 229Accountequity, 3, 340size, 7types, 76-77Account information form, 76Accumulation/Distribution, 123Acreage allotment, 331Add-on interest yield, 227Administrative law judge, 313Advisor see Commodity TradingAdvisorADX/ADXR, see Average directionalindexAllocation of assets, 41-42Allowances, 332
Alternative delivery procedure, 331Analysis see Data analysis,Fundamental analysis, TechnicalanalysisAnticipatory hedge, 150, 153Annualize, 332Appreciation, 332Arbitrage, 213-216, 332, 337, 342Arbitrageur, 256Ascending triangle, 114Audits, 32, 312, 319Average directional index(ADX/ADXR), 124
BBack-spreads, 193Back-testing, 55
355Copyright 2001 The McGraw-Hill Companies. Click Here for Terms of Use.
Index
Backwardation, 44Balance of payments, 332Bank(s), 202-203, 210Banker(s) 163-166Banking system see Federal ReserveBoardBankruptcy, 270Bar chart see ChartsBase loss point, 54Basis, 152, 158-160, 247-248, 332calculation method, 160-162risk, 229Basket investing, 43Bearcycle, 133market, 113, 333put spread, 286Beta, 259Bid, 321Board of Trade see Chicago Board ofTrade (CBOT)Bond, see also U.S. Treasury Bondprices, 11declining, 285-287rising, 289-230vs. commodities, 11vs. stocks, 11Bottoms, 114Box(es), 109Break-even point, 270, 291-295Breakaway gap, 116Breakouts, 122Bretton Woods agreement, 209Broker, 333, 334options, 269-271Brokerage, 71-77
account types, 76-77advisory services, 74computerized, 77expectations, 74-75firm, 73-74selection, 71-73, 269-271Bullcall spread, 289-290market, 113, 333cycle, 133Buy-call options, 289 see also OptionsBuy order, 79, see also OrdersBuyinghedge, 157-158power, 111-112Buy/sell signal, 110, 128
CCall, 333buying and selling, 280-285option, 264, 283, 286Candlestick chart, 124-125, see alsoChart(s)Capital, 49-55balances, 211-212controls 216losses, 196-197Capitalization see UndercapitalizationCarryback of losses, 196-197Carryforward of losses, 196-197Carrying charge hedge, 150, 151–152Cashcommodity, 279, 334flow expectation, 177forward contract, 174
356
Index
market, 62-63, 175, 277, 334options, 269price, 149, 171, 227rate, 174settlement, 6, 253CBOT see Chicago Board of TradeCentral Bank, see Federal ReserveCertificate of deposit (CD) 224, 227230CFTC, see Commodity FuturesTrading CommissionChannel, 148, see also Moving average, PriceChart formation, 114-117Chart patterns, 131Charting, 6Chart(s)s, 106-120bar chart, 106-107candlestick, 106interpretation, patterns, 111-114point-and-figure chart, 107-110services, 117-120Chicago Board of Trade (CBOT), 16,226, 230-232, 263, 303Chicago Butter and Egg Board, 304Chicago markets, 16, 20, 303,see also Midwest grain marketChicago Mercantile Exchange (CME),8, 91, 226, 254, 304Chicago Produce Exchange, 304Circuit breakers, 256-257Clearing House, 5, 299, 320,322-324, 335Combination order, 82-83Commercialpaper, 214
price risk, 8schedules, 62Commissions, 28, 59, 170, 187,270, 336Commitment of Traders Report, 92Commodity, 88-90, 304-305list of exchanges, 306-307publication sources, 93supply, 88types of, 310Commodity Channel Index, 125Commodity Exchange Act, 152-153,263-264, 311, 336Commodity futures, 1, 2, 3, 157, 158analysis, 6benefits, 8-10contracts, 2markets, 3purpose, 1trading, 3method, 6value, 10vs. bonds, 11Commodity Futures Exchangeadministration, 318-319committees, 320-325departments, 319-320U.S, 318-325Commodity Futures TradingCommission, 5, 35, 152-153, 253,335, see also Commitment ofTraders Reportprograms, 312-313Commodity Futures TradingCommission Act, 75, 311Commodity Pool Operator, 28, 36, 336357
Index
Commodity Price Charts, 106Commodity Research Bureau (CRB),11, 43CRB Index, 11Commodity Trading Advisor (CTA),28, 337evaluation, 34-37organizations, 33performance, 33-34, 36-37selection criteria, 34-36, 37services, 41-42single vs. multi, 37-38see also Managed Account ReportCompounding factor, 224, 250Compounding interest, 224Computers, 77, 117-120, 121-122,133-136software evaluation, 120see also Electronic tradingContract, 337Core trend position, 62Correction, 133Correlation, 37-39,102-104, 249Cost-of-carry, 173-175, 247Cost of living index, 100CPO, see Commodity Pool OperatorCrack spread, 195Crash of 1987, 16-17, 256Crash protectors, 256-257CRB Index, see Commodity ResearchBureauCross-hedge, 153, 232Crossover, 122CTA, see Commodity Trading AdvisorCurrency, 12-13, 200-201, 208-210convertibility, 216
Customer agreement form, 76Cycle analysis, 114Cycles, 97-99, see also Bear, Bull
DData analysis, 104, see also StatisticalanalysisData sources, 90-93Day order, 99, 338Dealer activity, 233-234De-leverage, 52Delivery, 176, 338-339Delta, 266, 277Demand, 86-87, 191, see alsoElasticityDescending triangle, 115-116Deutsche Termine Bourse, 15Differentials, 122, 193Directional movement index,123-124, 130Discipline, 25Disclosure document., 35, 76Distribution see AccumulationDivergence, 11Diversification, 61, see also RiskDividend payments, 6DMI, see Directional movement indexDomestic economic factors, 212-213Double option, 264Dow JonesIndex, 6, 100Industrial Average, 16, 255Theory, 133Downtrend, 112Drawdown, 37
358
Index
DTB, see Deutsche Termine BourseDual trading, 322
EEconomic factors see DomesticEducation, 312, 326department 319Efficient frontier, 39-40Elasticity, 87, 88Electronic tradingbenefits, 17-18control, 17definition, 15effects on trading, 18growth, 16see also ComputersElliott Wave Theory (EWT),131-132Energyfutures, 179hedging, 179-188Enforcement 312Envelope see Moving averageEOE (Amsterdam), 15Equity see AccountERM, see Exchange ratemechanismEurocurrency rates, 226Eurodollar, 225-234, 243, 340,futures contract, 227-228hedging, 229-230interest rate futures 226rates, 232-234, 277time deposit futures, 225see also TED spread
European markets, see LondonInternational Finance FuturesExchange, Nikkei Index, Marche aTerme De France,Excessinventory, 180-181reserves, 203Exchangeadministration, 318-319committees, 320-321departments, 319items traded, 306-307locations, 306-307rate expectations, 213rate price, 200staff, 319-320see also Commodity Futures,MidAmerica Commodity, NewOrleans Commodity, New YorkMerchntile, New York StockExecution price, 81Exercise, 264Exhaustion gap. 116Expansion, 90Expiration date, 265EWT, see Elliott Wave TheoryExchange rate mechanism (ERM)(European), 216Exponential moving average, 126Exponentially weighted movingaverage, 122
FFair letters, 300Fair market value, 271-273
359
Index
Federal Reserve Board, 3, 6,203-204, 226, 233-234Open Market Committee (FOMC),233-234Fee(s), 32administrative, 32-33brokerage, 32-33CTA management, 32-33general Partner, 32-33sales, 32-33schedule 35Fibonacci ratios, 131-133FIFO, see First in, first outFinance, 324-325Financial futures, 35, 56, 199-206Financial institutions, see BanksFirst in, first out (FIFO), 154Flower bonds, 219FOMC see Federal Reserve BoardFood Control Act, 304Forecasting, 95-103, 123 see alsoPricingForeigncurrency price, 208exchange rate, 205-206, 208,211-213exchange reserves, 350exchange transactions, 208Formation see ChartsForward hedge, 181-182Forward pricing hedge, 150Four-box reversal, 108, see alsoChartsFTSE, 254Fundamental analysis, 24, 77, 85,86-93
Fundamentalist vs. technician,143-144Funds, Free flow of, 215Futures (magazine), 93, 106Futures Price Index, 43-45Futures financial, 285-286Futures trading, 297characteristics, 298-299contract, 299funds, 28disadvantages, 31-32fees, 32-33history, foreign, 299-300history, U.S., 301-302laws and regulations, 305-311
GGamma, 266, 277Gap, 116-117General partner, 30, 36General price level, 212Globex, 17Glossary of terms, 331-354Gold call, 282-283Goldman Sachs Commodity Index(GSCI), 43-45Good-faith, 324GP, see General partnerGrain Futures Act, 307Growth rate, 212GSCI, see Goldman SachsCommodity IndexGuaranteed funds, 30, 32
360
Index
H
I
Hatch Bill, 305Head-and-shoulders formation, 114,116Heating oil market, 62Hedger, 7, 21, 165-166Hedging, 9, 147-155, 157-162, 179183, 229-230, 258, 283-284, 342and financial institutions, 163-166and portfolio manager, 259-260benefits, 151-152broker, 175-176cattle, 168-170certificates of deposit, 251-252currency, examples of, 240-242delivery, 176energy futures, 179-183examples, 149, 167-177feasibility, 154, 176, 235-238Fed funds rate, 248-249function, 9, 162hogs, 170-173index futures, 258interest rate futures, 242-243, 245247, 249-251limitations, 153prime rate, 248ratios, 238-239risk, 177sinking funds, 251types of, 150-151see also Arbitrage, Insurancehedge, Long hedge, Short hedge
IMF see International Monetary FundIMM, see International MonetaryMarketIndexfutures volatility, 256numbers, 100-102see also Average Directional,Commodity Channel,Commodity Research Bureau,Cost of living, DirectionalMovement, Dow Jones, FuturesPrice, Goldman SachsCommodity, New Yor StockExchange Composite, TradingAdvisor QualifiedInflation, 204-206, 212Insurance, see RiskInsurance hedge, 151Inter-commodity market spread, 82-83Interestarbitrage, 213-216contracts, 225-234costs, 274on-margin, 176on-interest, 224parity, 215, 342rates, 12, 204-205, 213-216and the economy, 232-234rising, 285-286swap, 352-253International, 208economy, 212-213monetary system, history,208-210
361
Index
Money Market (IMM), 211, 213,244, 226, 304Monetary Fund (IMF), 211, 208-209trade, 211-212, 213Internet, 17Inter-season spreads, 190Intervention limits, 343In-the-money option, 265, 291Intra-commodity spread, 82-83Intrinsic value, 265Inventory, 281-282, see also Excessin transit, 182-183
KKansas City Board of Trade, 253Key reversal, 128-129
LLast in, first out, 154Leverage, 2-5LIBOR, 229-230, see LondonInterbank Offer RateLIFFE, see London InternationalFinance Futures ExchangeLIFO, see Last in, first outLimit order, 81, 344Limited partnership, 29-31, 77Liquid assets, 49Liquidation, 60-61, 344Loans, 164-166hedged collateral, 164-166London Interbank Offer Rate(LIBOR), 227London International Finance FuturesExchange (LIFFE), 16
Long hedge, 170-173, 345Loss limit, 59
MMACD, see Moving AverageConvergence DivergenceManaged Account Report, 28-29, 34Managed futures, 28-29MAR, see Managed Account ReportMarche à Terme de France, 16Margin, 2, 3, 258, 265, 345Marketcomparison, 10if-touched order, 81, 346relative size, 4-5reporting services, 91Mathematical expectation, 51-52, 58MATIF, see Marche a Terme DeFranceMaturity, 226-231Member broker, 323-324MidAmerica Commodity Exchange,305Midwest grain market, 302-303Modern Portfolio Theory, 39Momentum oscillator, 125-126, 130Money, 3, 199-206, 207and the banking system, 202-204and the economy, 201-202, 346prices, 199-206supply, 3trading, 207-216Money management, see Trading planMoving average, 99-101, 195channel, 122
362
Index
envelope, 126exponentially weighted, 122oscillators, 122-123Moving Average ConvergenceDivergence, 122-123, 125, 129, 130
NNaked writing, 265NASDAQ, 5National Futures Association (NFA),72, 73, 313-315NAV, see Net asset valueNet asset value (NAV), 30Net worth, 49Neural networks, 133-136New Orleans Commodity Exchange,305New York Mercantile Exchange(NYMEX), 179, 182New York Stock Exchange (NYSE), 4,254Composite Index, 254, 259NFA, see National Futures AssociationNikkei Index, 254NYMEX see New York MercantileExchangeNYSE, see New York Stock Exchange
OOff-at-specific-time order, 80Offer(s), 321, 346Oil crack spread, 195On balance volume (OBV), 126-127On-the-close order, 80On-the opening order, 80
Open interest, 139-143, 347changes in, 140definition, 139information sources, 141seasonal patterns, 142-143Operational hedge, 150Optionsbroker, 269-271feasibility, 277Greek language terms, 266-267speculating, 282-284spreads, 193strategies, 279-286price, 287-290terminology, 264-265, 347trade selection, 290-291trading, 263-278value pricing, 271-275versus futures, 292-295versus futures contracts, 267-269,276versus physicals, 276see also Buy-callOrders, 79-83combination, 82contingent, 82electronic, 83placing, 83price, 80-81scale, 82spread, 82stop, 81stop-limit, 81-82timing of, 79-80Organized futures tradingcharacteristics, 298-299363
Index
emergence, 299-300Japan, 300-301U.S