Commodity Futures Terms

The glossary is to help you with a better understanding of the futures market.
 

A B C D E F G H I L M N O P R S T U V W Y

A
Accrued Interest: Interest earned between the most recent interest payment and the present date but not yet paid to the lender.

Add-on Method: A method of paying interest where the interest is added onto the principal at maturity or interest payment dates.
Adjusted Futures Price: The cash-price equivalent reflected in the current futures price. This is calculated by taking the futures price times the conversion factor for the particular financial instrument (e.g., bond or note) being delivered.

Arbitrage: The simultaneous purchase and sale of similar commodities in different markets to take advantage of a price discrepancy.
Arbitration: The procedure of settling disputes between members, or between members and customers.
Assign: To make an option seller perform his obligation to assume a short futures position  or a long futures position.
Associated Person : An individual who solicits orders, customers, or customer funds on behalf of a Futures Commission Merchant, an Introducing Broker, a Commodity Trading Adviser, or a Commodity Pool Operator.
At-the-Money Option: An option with a strike price that is equal, or approximately equal, to the current market price of the underlying futures contract.
B
Balance of Payment: A summary of the international transactions of a country over a period of time including commodity and service transactions, capital transactions, and gold movements.
Bar Chart: A chart that graphs the high, low, and settlement prices for a specific trading session over a given period of 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.
Bear Spread: In most commodities and financial instruments, the term refers to selling the nearby contract month, and buying the deferred contract, to profit from a change in the price relationship.
Bid: An expression indicating a desire to buy a commodity at a given price; opposite of offer.
Board of Trade Clearing Corporation: An independent corporation that settles all trades made at the Chicago Board of Trade acting as a guarantor for all trades cleared by it, reconciles all clearing member firm accounts each day to ensure that all gains have been credited and all losses have been collected, and sets and adjusts clearing member firm margins for changing market conditions. Also referred to as clearing corporation.
Book Entry Securities: Electronically recorded securities that include each creditor’s name, address, Social Security or tax identification number, and dollar amount loaned, (i.e., no certificates are issued to bond holders, instead, the transfer agent electronically credits interest payments to each creditor’s bank account on a designated date).
Broker: A company or individual that executes futures and options orders on behalf of financial and commercial institutions and/or the general public.
Bull: Someone who thinks market prices will rise.
Bull Market: A period of rising market prices.
Bull Spread: In most commodities and financial instruments, the term refers to buying the nearby month, and selling the deferred month, to profit from the change in the price relationship.
Butterfly Spread: The placing of two interdelivery spreads in opposite directions with the center delivery month common to both spreads.

C
Calendar Spread: See Interdelivery Spread and Horizontal Spread.
Call Option: An option that gives the buyer the right, but not the obligation, to purchase (go “long”) the underlying futures contract at the strike price on or before the expiration date.
Canceling Order: An order that deletes a customer’s previous order.
Carrying Charge: For physical commodities such as grains and metals, the cost of storage space, insurance, and finance charges incurred by holding a physical commodity. In interest rate futures markets, it refers to the differential between the yield on a cash instrument and the cost of funds necessary to buy the instrument. Also referred to as cost of carry or carry.
Carryover: Grain and oilseed commodities not consumed during the marketing year and remaining in storage at year’s end. These stocks are “carried over” into the next marketing year and added to the stocks produced during that crop year.
Cash Commodity: An actual physical commodity someone is buying or selling, e.g., soybeans, corn, gold, silver, Treasury bonds, etc. Also referred to as actuals.
Cash Contract: A sales agreement for either immediate or future delivery of the actual product.
Cash Market: A place where people buy and sell the actual commodities, i.e., grain elevator, bank, etc. See Spot and Forward Contract.
Cash Settlement: Transactions generally involving index-based futures contracts that are settled in cash based on the actual value of the index on the last trading day, in contrast to those that specify the delivery of a commodity or financial instrument.
Certificate of Deposit (CD): A time deposit with a specific maturity evidenced by a certificate.
Charting: The use of charts to analyze market behavior and anticipate future price movements. Those who use charting as a trading method plot such factors as high, low, and settlement prices; average price movements; volume; and open interest. Two basic price charts are bar charts and point-and-figure charts.
Cheap: Colloquialism implying that a commodity is underpriced.
Cheapest to Deliver: A method to determine which particular cash debt instrument is most profitable to deliver against a futures contract.
Clear: The process by which a clearinghouse maintains records of all trades and settles margin flow on a daily mark-to-market basis for its clearing member.
Clearinghouse: An agency or separate corporation of a futures exchange that is responsible for settling trading accounts, clearing trades, collecting and maintaining margin monies, regulating delivery, and reporting trading data. Clearinghouses act as third parties to all futures and options contracts acting as a buyer to every clearing member seller and a seller to every Clearing member buyer.
Clearing Margin: Financial safeguards to ensure that clearing members (usually companies or corporations) perform on their customers’ open futures and options contracts. Clearing margins are distinct from customer margins that individual buyers and sellers of futures and options contracts are required to deposit with brokers.
Clearing Member: A member of an exchange clearinghouse. Memberships in clearing organizations are usually held by companies. Clearing members are responsible for the financial commitments of customers that clear through their firm.
Closing Range: A range of prices at which buy and sell transactions took place during the market close.
COM Membership (CBOT): A Chicago Board of Trade membership that allows an individual to trade contracts listed in the commodity options market category.
Commission Fee: A fee charged by a broker for executing a transaction. Also referred to as brokerage fee.
Commission House: See Futures Commission Merchant (FCM).
Commodity: An article of commerce or a product that can be used for commerce. In a narrow sense, products traded on an authorized commodity exchange. The types of commodities include agricultural products, metals, petroleum, foreign currencies, and financial instruments and indexes, to name a few.
Commodity Credit Corporation (CCC): A branch of the U.S. Department of Agriculture, established in 1933, that supervises the government’s farm loan and subsidy programs.
Commodity Futures Trading Commission (CFTC): A federal regulatory agency established under the Commodity Futures Trading Commission Act, as amended in 1974, that oversees futures trading in the United States. The commission is comprised of five commissioners, one of whom is designated as chairman, all appointed by the President subject to Senate confirmation, and is independent of all cabinet departments.
Commodity Pool: An enterprise in which funds contributed by a number of persons are combined for the purpose of trading futures contracts or commodity options.
Commodity Pool Operator (CPO): An individual or organization that operates or solicits funds for a commodity pool.
Commodity Trading Adviser (CTA): A person who, for compensation or profit, directly or indirectly advises others as to the value or the advisability of buying or selling futures contracts or commodity options. Advising indirectly includes exercising trading authority over a customer’s account as well as providing recommendations through written publications or other media.
Computerized Trading Reconstruction (CTR) System: A Chicago Board of Trade computerized surveillance program that pinpoints in any trade the traders, the contract, the quantity, the price, and time of execution to the nearest minute.

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

Convergence: A term referring to cash and futures prices tending to come together (i.e., the basis approaches zero) as the futures contract nears expiration.
Conversion Factor: A factor used to equate the price of T-bond and T-note futures contracts with the various cash T-bonds and T-notes eligible for delivery. This factor is based on the relationship of the cash-instrument coupon to the required 8 percent deliverable grade of a futures contract as well as taking into account the cash instrument’s maturity or call.

Coupon: The interest rate on a debt instrument expressed in terms of a percent on an annualized basis that the issuer guarantees to pay the holder until maturity.
Crop (Marketing) Year: The time span from harvest to harvest for agricultural commodities. The crop marketing year varies slightly with each ag commodity, but it tends to begin at harvest and end before the next year’s harvest, e.g., the marketing year for soybeans begins September 1 and ends August 31. The futures contract month of November represents the first major new-crop marketing month, and the contract month of July represents the last major old-crop marketing month for soybeans.
Crop Reports: Reports compiled by the U.S. Department of Agriculture on various ag commodities that are released throughout the year. Information in the reports includes estimates on planted acreage, yield, and expected production, as well as comparison of production from previous years.
Cross-Hedging: Hedging a cash commodity using a different but related futures contract when there is no futures contract for the cash commodity being hedged and the cash and futures markets follow similar price trends (e.g., using soybean meal futures to hedge fish meal).
Crush Spread: The purchase of soybean futures and the simultaneous sale of soybean oil and meal futures.
Current Yield: The ratio of the coupon to the current market price of the debt instrument.
Customer Margin: Within the futures industry, financial guarantees required of both buyers and sellers of futures contracts and sellers of options contracts to ensure fulfillment of contract obligations. FCMs are responsible for overseeing customer margin accounts. Margins are determined on the basis of market risk and contract value. Also referred to as performance-bond margin.