Commodity Futures Glossary

Like many other industries, the futures industry has its own “language” – sometimes just jargon but also a number of unique terms that apply specifically to the trading instruments being discussed.

When other traders are talking futures, it may be important that you understand what these terms mean. You will find other references to trading terms and lingo on this site, but here is a handy reference guide that gives you a complete alphabetical listing of the many terms traders use. You may not have to deal with many of these terms, but someone in the industry does, and it may be helpful to know what a new term means should you ever encounter it.

A B C D E F G H I J K L M

N O P Q R S T U V W X Y Z
 

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

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

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

Actuals - The physical or cash commodity, as distinguished from commodity futures contracts. Also see Cash Commodity, Spot Commodity.

Add-on Method - A method of paying interest where the interest is added onto the principle 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.

Alternate Delivery Procedure (ADP) - A contract delivery method that permits the buyer and seller, by agreement, to settle their delivery commitment independent of the exchange.

Against Actuals - Also see Exchange for Physicals.

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 speculative limit compliance.

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. Also see Differentials.

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

Arbitrage - The simultaneous purchase of similar commodities in the same or different markets profit from a discrepancy in prices. Also includes some aspects of hedging. Also see Spread, Switch.

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

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

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 (AP) - An individual who solicits orders, customers, or customer funds (or who supervises persons performing such duties) on behalf of a Futures Commission Merchant, an Introducing Broker, a Commodity Trading Advisor, or a Commodity Pool Operator.

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

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

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.

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

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

Balance of Payment - A summary of the international transactions of a country over a period of time including commodity and service 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 used to calculate the 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 hedging position is established and the time that it is lifted.

Bear - Someone who expects a decline in prices. The opposite of bull. A news item is considered bearish if it is expected to bring lower prices.

Bearish Opinion - A belief that the price of the commodity underlying the futures contract will decline and, therefore, futures prices will decline.

Bear Market - A period of declining market prices.

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 is wrong. In the 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 commodity price but at the same time seeks to limit the potential loss if this expectation is wrong. 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 the sold option.

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.

Bid - An offer to buy a specific quantity of a commodity at a stated price, subject to immediate acceptance.

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

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

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. Also see Clearinghouse.

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 has established 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 commodity.

Break - A rapid and sharp price change.

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

Broker - A person paid a fee or commission for executing buy or sell orders of a customer. In commodity 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 merchant; and (3) the Futures Commission Merchant.

Brokerage Fee - See Commission Fee.

Brokerage House - See Futures Commission Merchant.

Bucketing - Directly or indirectly taking the opposite side of a customer's order into the broker's own account or into an account in which the 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.

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

Bull Market - A period of rising market prices.

Bull Spread - The simultaneous purchase of the nearby month, and selling the deferred month, to profit from the change in the price relationship.

Bull Vertical Spread - A strategy used when an investor expects that the price of a commodity 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 price than the sold option.

Bullish Opinion - A belief that the price of the commodity underlying the futures contract will rise and, therefore, futures prices will rise.

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

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 options 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.

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

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

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 had previously prevailed. Also see Seller's Market.

Buying Hedge (or Long Hedge) - Hedging transaction in which futures contracts are bought to protect against possible increased cost of commodities. Also see Hedging, Purchasing Hedge.

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

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

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C

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

Calendar Spread - See Interdelivery Spread or Horizontal Spread.

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 future 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 to purchase the commodity or to enter into a long 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 Option - A contract that grants the purchaser the right, but not the obligation, to buy the underlying instrument at the specified strike price on or before the expiration date. The buyer pays a premium to the seller of the contract. A call option is bought with the expectation of a rise in prices (going long). 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.

Capping - Effecting commodity or security transactions shortly prior to an option's expiration date by 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 received there from will be protected.

Carrying Broker - A member of a futures exchange, usually a futures commmission merchant (FCM), through whom another broker or customer elects to clear all or some of their trades.

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

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." 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.

Cash Commodity - The physical or actual commodity as distinguished from the futures contract. Sometimes called Spot Commodity or Actuals.

Cash Contract - A sales agreement for either immediate or future delivery of the actual product.

Cash Forward Sale - See Forward Contracting.

Cash Market - The place where people buy and sell the actual commodities, taking the form of: (1) an organized, self-regulated central market (e.g., a commodity 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 - 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.

Central Bank - A financial institution that has official or semiofficial status in a federal government. Central banks are the instruments used by governments to expand, contract or stabilize the supply of money and credit. They hold reserves of other banks, act as fiscal agents for their governments and can issue paper money.

Certified Stocks - Quantities of commodities designated and certified for delivery by an exchange under its trading and testing regulations at delivery points specified and approved by the exchange.

CFTC - See Commodity Futures Trading Commission.

CFO - Cancel Former Order.

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 read from graphs of price movements.

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.

Chooser Option - An option which is transacted in the present but at a pre-specified future date is chosen to be either a put or a call option.

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

Circuit Breaker - A system of trading halts and price limits on equities and derivative markets designed to provide a cooling-off period during large, intra-day market declines. 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 at strike price 62 and a May call at strike price 58).

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 members.

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

Clearing Corporation - See Board of Trade Clearing Corporation.

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 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 Customer Margin.

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.

Clearing Price - See Settlement Price.

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

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

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

Closing Price (or Range) - The price (or price range) recorded in trading that takes place in the final moments of a day's trade that are 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.

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

Commercial Stocks - Commodity in storage in public and private elevators or warehouses at important markets and afloat in vessels or barges in harbors and ports.

Commission - (1) The charge made by a commission house for buying and selling commodities; (2) the CFTC.

Commission House - See Futures Commission Merchant (FCM).

Commitments - Made when a trader assumes the obligation to accept or make delivery by entering into a futures contract. See Open Interest.

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
index.

Commodity Credit Corp. - A branch of the U.S. Department of Agriculture that supervises the government's farm loan and subsidy programs.

Commodity Exchange Act - Federal act passed in 1936 establishing the Commodity Exchange Authority and placing futures trading in a wide range of commodities under the regulation of the government.

Commodity Futures Trading Commission (CFTC) - The Federal regulatory agency established by the CFTC Act of 1974 to administer the Commodity Exchange Act.

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 commodity futures or option contracts.

Commodity Pool Operator - An individual or organization that operates or solicits funds for a commodity pool.

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 Trading Advisor (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.

Concurrent Indicators - See Lagging Indicators.

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.

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

Contract - (1) A unit of trading for a commodity future or option; (2) An agreement 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 - See Deliverable Grades.

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 commodity represented in a contract.

Controlled Account - See 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.

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.

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

Corn-Hog-Ratio - See Feed Ratio.

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

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

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

Coupon (Coupon Rate) - 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.

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

Covered Option - A short call or put option position which is covered by the sale or purchase of the underlying futures contract or physical commodities. 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.

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

Crop (Marketing) Year - The time period from one harvest to the next for agricultural commodities. The crop year varies slightly with each commodity (i.e., the marketing year for soybeans begins September 1 and ends in 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 include estimates on planted acreage, yield, and expected production, as well as comparison of production from previous years.

Cross-Hedge - Hedging a cash market position in a futures contract for a different but price-related commodity (e.g., using soybean meal futures to hedge fish meal).

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 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.

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

Current Delivery Month - The futures contract which matures and becomes deliverable during the present month. Also called Spot Month. Daily Price Limits. See Limit Up, or Down).

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.

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D

Day Order - An order that expires automatically at the end of each day's trading session if not filled. 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.

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

Day Traders - Commodity traders, generally members of the exchange on the trading floor, who take positions in commodities and then offset them prior to the close of trading on the same trading day.

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

Dealer Option - A put or call on a physical commodity, 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 and offered to public customers, although the reverse may also be true.

Deck - The orders for purchase or sale of futures and option contracts held in the hands of 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 Sale.

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

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 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 commodity 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 making or accepting delivery. Also referred to as contract month.

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.

Delta - A measure of how much an option premium changes, given a unit change in the underlying futures price. Delta is often interpreted as the probability that the option will be in-the-money by expiration.

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 or physical commodity.

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

Devaluation - A formal and 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 - Price differences between classes, grades, and delivery locations of various stocks of the same commodity.

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 future is lower than that of May; (3) an option is trading at a discount if it is trading for less than its intrinsic value.

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

Discount Bond - A bond selling below par.

Discount Method - A method of paying interest by issuing a security at less than par and repaying par value at maturity. The difference between the higher par value and the lower purchase price is the interest.

Discount Rate - The interest rate charged on loans by the Federal Reserve Bank.

Discretionary Account - An arrangement by which the holder of an account gives written power of attorney to someone else, often a broker, to make trading decisions. Also known as a managed or controlled account.

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

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 commodity 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.

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.

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

Ease Off - A minor and/or slow decline in the prices of a market. ECU - See European Currency Unit.

Econometrics - The application of statistical and mathematical methods in the field of economics to test and quantify economic theories and the solutions to economic problems.

Efficient Market - A market in which new information is immediately available gratis 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.

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 waves rising and falling rhythmically.

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 were liquidated at current prices.

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).

Eurodollars - U.S. dollars on deposit with a bank outside the U.S., and consequently, outside its jurisdiction. The bank could be either a foreign bank or a subsidiary of a U.S. bank.

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 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.

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

Evening Up - Buying or selling to offset an existing market position. See Liquidation.

Exchange For Physicals (EFPs) - A technique where a physical commodity position is traded for a futures position.

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.

Exercise - The action taken by the holder of a call option if they wish to purchase the underlying futures contract, or by the holder of a put option if they wish to sell the underlying futures contract.

Exercise an Option - To enter the futures market at the strike price.

Exercise Price - See Strike Price.

Exotic Options - Any of a wide variety of options with non-standard payout structures, including Asian options and Lookback options 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 becomes void. At a specified time on the expiration date, the option can no longer be exercised or sold. For example, an option on a March futures contract expires in February but is referred to as a March option because its exercise would result in a March futures contract position.

Ex-Pit Transactions - Trades executed, for certain technical purposes, in a location other than the regular exchange trading pit.

Extrinsic Value - See Time Value.

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F
Face Value - The amount of money printed on the face of the certificate of a security; the original dollar amount of indebtedness incurred.

Federal Funds - Member bank deposits at the Federal Reserve; these funds are loaned by member banks to other member banks.

Federal Funds Rate - The rate of interest charged for the use of federal funds.

Federal Reserve System - A central banking system in the United States, created by the Federal Reserve Act in 1913, designed to assist the nation in attaining its economic and financial goals. The structure of the Federal Reserve System includes a Board of Governors, the Federal Open Market Committee, and 12 Federal Reserve Banks.

Feed Ratio - A ratio used to express the relationship of feeding costs to the dollar value of livestock. These serve as indicators of the profit margin or lack of profit in feeding animals to market weight. See Hog/Corn Ratio and Steer/Corn Ratio.

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 - A customer order that is a price limit order that must be filled immediately or cancelled.

First Notice Day (FND) - According to Chicago Board of Trade rules, the first day on which a notice of intent to deliver a commodity in fulfillment of a given month's futures contract can be made by the clearinghouse to a buyer. The clearinghouse also informs the sellers who they have been matched up with.

Fix, Fixing - See Gold Fixing.

Floor Broker - Any person who, in or surrounding 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 for future delivery. This person must be an exchange member and also trade for his own account under certain conditions.

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

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

Forced Liquidation - The situation in which a customer's account is liquidated (open positions are offset) by the brokerage firm holding the account, or, in the case of leverage accounts, by the leverage transaction merchant, usually after notification (margin calls), because
the account is undercapitalized.

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 - A foreign exchange market where foreign currency is bought and sold for immediate or future delivery.

Forward - In the future.

Forwardation - See Contango.

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

Free Crowd System - A system of trading, common to most U.S. commodity 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.

Frontrunning - With respect to commodity 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 - A method of anticipating future price movement using supply and demand information. See Technical Analysis.

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

Futures - A term used to designate all contracts covering the sale of commodities for future delivery on a commodity exchange. See Futures Contract.

Futures Commission Merchant (FCM) - An individual or organization that solicits or accepts orders to buy or sell futures contracts or options on futures and accepts money or other assets from customers to support such orders. Also referred to as commission house or wire house.

Futures Contract - A legally binding agreement to purchase or sell a commodity 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.

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-the-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 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.

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

GTC - See Good Till Cancelled.

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 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 after-hours 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) and the Chicago Board of Trade (CBOT), Globex was launched on June 25, 1992, for certain CME and CBOT contracts. Various MATIF (Marche a Terme International de France) contracts are scheduled to begin trading in early 1993, and, at this writing—August 1992, several New York and European exchanges have expressed an interest in participating in Globex.

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.

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

Good Till Cancelled Order (GTC) - Order which is valid at any time during market hours until executed or cancelled. See Open Order.

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.

Grain Terminal - Large grain elevator facility with the capacity to ship grain by rail and/or barge to domestic or foreign markets.

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.

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. For example, the difference between the
cost of soybeans and the combines dales income of the processed soybean oil and meal. See Crack and Crush.

GTC - See Good Till Cancelled Order.

GTW - See Good This Week Order.

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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.

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

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

Hedge - A position in a commodity for which there is an offsetting position.

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. Someone that make purchases and sales in the futures market solely for the purpose of establishing a known price level – weeks or months in advance – for something they later intend to buy or sell in the cash market (such as at a grain elevator or in the bond market). Hedgers willingly give up the opportunity to benefit from favorable price changes in order to achieve protection against unfavorable price changes. For example, an option purchased opposite a position in the futures market.

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

Hog/Corn Ratio - The relationship of feeding costs to the dollar value of hogs. It is measured by dividing the price of hogs ($/hundredweight) by the price of corn ($/bushel). When corn prices are high relative to pork prices, fewer units of corn equal the dollar value of 100 pounds of pork. Conversely, when corn prices are low in relation to pork prices, more units of corn are required to equal the value of 100 pounds of pork. 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. See Commission Rule 34.1(b).

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I

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 inter-market spreads between the futures contract and the index itself.

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.

In Sight - The amount of a particular commodity that arrives at terminal or central locations in 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.

Intercommodity Spread - The purchase of a given delivery month of one futures market and the simultaneous sale of the same delivery month of a different, but related, futures market. See Spread.

Interdelivery Spread - The purchase of one delivery month of a given futures contract and simultaneous sale of another delivery month of the same commodity on the same exchange. See Spread.

Interest Arbitrage - The process where 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 U.S. Treasury issues 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.

Intermarket Spread - The sale of a given delivery month of a futures contract on one exchange and the simultaneous purchase of the same delivery month and futures contract on another exchange.

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

In-The-Money Option - Describes an option with intrinsic (positive) value if exercised. A call option is in-the-money if its strike price is below the current price of the underlying futures contract. A put option is in-the-money if its strike price is above the current price of the underlying futures contract. See Intrinsic Value.

Intrinsic Value - The amount by which an option is in-the-money.

Introducing Broker (IB) - A person or organization that solicits or accepts orders to buy or sell futures contracts or commodity options but does not accept money or other assets from customers to support such orders.

Inverted Market - A futures market in which the relationship between two delivery months of the same commodity is abnormal. That is, 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. 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.

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

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K
Kerb Trading or Dealing - See Curb Trading.

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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 (accepted). The unexecuted balance is then crossed with the contra-side trader found by the LOX procedures.

Large Traders - A large trader is one who holds or controls a position in any one future or in any one option expiration series of a commodity 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 (LTD) - According to the Chicago Board of Trade rules, the final day when trading may occur in a given futures or option contract month. Futures contracts outstanding at the end of the last trading day must be settled by delivery of the underlying commodity or securities or by agreement for monetary settlement.

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 - The ability to control large dollar amounts of a commodity with a comparatively small amount of capital. See margin.

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 a 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.

Life of Contract - Period between beginning of trading 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.

Limits - Stated in terms of the previous day's closing price plus and minus so many cents or dollars per trading unit. Once a futures price has increased by its daily limit, there can be no trading at any higher price until the next day of trading. Conversely, once a futures price has declined by its daily limit, there can be no trading at any lower price until the next day of trading. For some contracts, daily price limits are eliminated during the month in which the contract expires.  Because prices can become particularly volatile during the expiration month (also called the delivery or spot month), persons lacking experience in futures trading may wish to liquidate their positions prior to that time. Because of daily price limits, there may be occasions when it is not possible to liquidate an existing futures position at will.

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 to buy or sell a futures contract at the specific price you state (or better), as contrasted with a market order which implies that the order should be filled as soon as possible.

Liquid - A characteristic of a security or commodity market with enough units outstanding to allow large transactions without substantial change in price. Institutional investors are inclined to seek out liquid investments so that their trading activity will not influence the market 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.

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. See Cover.

Liquidity - How easy it is to get out/in a market at a reasonable price close to your specified exit/entry price. Two useful indicators of liquidity are volume of trading and Open Interest (the number of traders willing to buy and sell).

Liquid Market - A market in which selling and buying can be accomplished with minimal price change.

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) A market position which has been established through the purchase of an option or future and for which no offsetting sale has been made; (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. See Purchasing Hedge.

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.

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.

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

Maintenance Margin - A sum usually smaller than, but part of, the original margin (security deposit) that must be maintained on deposit at all times. If customer equity in any futures position drops to or under the maintenance margin level, the broker must issue a call for the amount of money required to restore the customer's equity in the account back to the original margin level. See Margin.

Managed Account - See Controlled Account, Discretionary Account.

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 or 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.

Monetary deposit to buy/sell a futures contract. Leverages your resources. Small deposit amount purchases large commodity value. The smaller the margin in relation to the value of the futures contract, the greater the leverage. The high leverage can produce large profits in relation to your initial margin. Conversely, if prices move in the opposite direction, high leverage can produce large losses in relation to your initial margin. You must clearly understand the concept of leverage as well as the amount of gain or loss that will result from any given change in the futures price of the particular futures contract you would be trading.

The margin required to buy or sell a futures contract is solely a deposit of good faith money that can be drawn on by your brokerage firm to cover losses that you may incur in the  course of futures trading. It is like money held in an escrow account. Margins are typically 5% of the current value of the futures contract.

There are two types of margins: Initial margin and maintenance margin.

Initial margin (sometimes called original margin) is the sum of money that the customer must deposit with the brokerage firm for each futures contract to be bought or sold. When profits accrue on your open positions, the profits are added to the balance in your margin account. When losses accrue, the losses are deducted from the balance in your margin account.

If and when the funds remaining available in your margin account are reduced by losses to below a certain level - known as the maintenance margin requirement - your broker will require that you deposit additional funds to bring the account back to the level of the initial margin. See Clearing Margin, Customer Margin.

Margin Call - A demand by the brokerage firm for additional funds to bring margin deposits up to a required minimum level, because of adverse price movement. You will be required to keep an amount equal to the maintenance margins in your open account. If you are unable to do so, your position will be liquidated.

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

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-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 or option at the prevailing market price when the order reaches the floor of the exchange. Considered a day order. See At-The-Market.

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 actual commodity.

Maximum Price Fluctuation - See Tick, Limit Up, Limit Down.

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 Fluctuations - 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.

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.