Investment Terms A-K

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

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

Actuals: The physical or cash commodity, as distinguished from a commodity futures contract. Also see Cash and Spot Commodity

Aggregation: The principle under which all futures positions owned or controlled by one trader (or group of traders acting in concert) are combined to determine reporting status and compliance with speculative limits.

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

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

Arbitrage: Simultaneous purchase of cash commodities or futures in one market against the sale of cash commodities or futures in the same or a different market to profit from a discrepancy in prices. Also includes some aspects of hedging. See Spread, Switch.

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

Assignable Contract: One which allows the holder to convey his rights to a third party. Exchange-traded contracts are not assignable. 

Associated Person: A person associated with any futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, or leverage transaction merchant as a partner, officer, employee, consultant, or agent. Also, any person occupying a similar status or performing similar functions, in any capacity that involves: (a) the solicitation or acceptance of customers' orders, discretionary accounts, or participation in a commodity pool (other than in a clerical capacity); or (b) the supervision of any person or persons so engaged. 

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: When an option's exercise price is the same as the current trading price of the underlying commodity, the option is at-the-money.

Audit Trail: The record of trading information identifying, for example, the brokers participating in each transaction, the firms clearing the trade, the terms and time of the trade, and, ultimately, and when applicable, the customers involved.

Back Months: Those futures delivery months with expiration or delivery dates furthest into the future; futures delivery months other than the spot or nearby delivery month. 

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.

Banker's Acceptance: A draft or bill of exchange accepted by a bank where the accepting institution guarantees payment. Used extensively in foreign trade transactions.

Basis: The difference between the spot or cash price of a commodity and the price of the nearest futures contract for the same or a related commodity. Basis is usually computed in relation to the futures contract next to expire and may reflect different time periods, product forms, qualities, or locations. 

Basis Grade: The grade of a commodity used as the standard or par grade of a futures contract. 

Basis Point: The measurement of a change in the yield of a debt security. One basis point equals 1/100 of one percent. 

Basis Quote: Offer or sale of a cash commodity in terms of the difference above or below a futures price (e.g., 10 cents over December corn). 

Basis Risk: The risk associated with an unexpected widening or narrowing of basis between the time a hedge position is established and the time that it is lifted. 

Bear: One who expects a decline in prices. The opposite of a "bull." A news item is considered bearish if it is expected to result in lower prices.

Bear Market: A market in which prices are declining. 

Bear Spread: The simultaneous purchase and sale of two futures contracts in the same or related commodities with the intention of profiting from a decline in prices but at the same time limiting the potential loss if this expectation does not materialize. In agricultural products, this is accomplished by selling a nearby delivery and buying a deferred delivery. 

Bear Vertical Spread: A strategy employed when an investor expects a decline in a commodity price but at the same time seeks to limit the potential loss if this expectation is not realized. This spread requires the simultaneous purchase and sale of options of the same class and expiration date but different strike prices. For example, if call options are spread, the purchased option must have a higher exercise price than option that is sold. 

Beta (Beta Coefficient): A measure of the variability of rate of return or value of a stock or portfolio compared to that of the overall market. 

Bid: An offer to buy a specific quantity of a commodity at a stated price. 

Blackboard Trading: The practice of selling commodities from a blackboard on a wall of a commodity exchange. 

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

Board Broker System: A system of trading in which an individual member of an exchange (or a nominee of the member) is designated as a Board Broker for a particular commodity with the responsibility of executing orders left with him by other members on the floor, providing price quotations, and maintaining orderliness in the trading crowd. A Board Broker may not trade for his own account or the account of an affiliated organization. Also See Free Crowd Systems and Specialist System. 

Board Order: See Market-if-Touched Order. 

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

Boiler Room: An enterprise which often is operated out of inexpensive, low-rent quarters (hence the term "boiler room") that uses high pressure sales tactics (generally over the telephone) and possibly false or misleading information to solicit generally unsophisticated investors. 

Booking the Basis: A forward pricing sales arrangement in which the cash price is determined either by the buyer or seller within a specified time. At that time, the previously-agreed basis is applied to the then-current futures quotation. 

Book Transfer: A series of accounting or bookkeeping entries used to settle a series of cash market transactions. 

Box Transaction: An option position in which the holder establishes a long call and a short put at one strike price and a short call and a long put at another strike price, all of which are in the same contract month in the same commodity. 

Break: A rapid and sharp price decline. 

Broker: A person paid a fee or commission for executing buy or sell orders for 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 merchants; or (3) the Futures Commission Merchant. 

Broker Association: Two or more exchange members who (1) share responsibility for executing customer orders; (2) have access to each other's unfilled customer orders as a result of common employment or other types of relationships; or (3) share profits or losses associated with their brokerage or trading activity. 

Bucketing: Directly or indirectly taking the opposite side of a customer's order into a broker's own account or into an account in which a broker has an interest, without open and competitive execution of the order on an exchange. 

Bucket Shop: A brokerage enterprise which "books" (i.e., takes the opposite side of) a customer's order without actually having it executed on an exchange. 

Bulge: A rapid advance in prices. 

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

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

Bull Market: A market in which prices are rising. 

Bull Spread: The simultaneous purchase and sale of two futures contracts in the same or related commodities with the intention of profiting from a rise in prices but at the same time limiting the potential loss if this expectation is wrong. In agricultural commodities, this is accomplished by buying the nearby delivery and selling the deferred. 

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 or strike price than the sold option. 

Buoyant: A market in which prices have a tendency to rise easily with a considerable show of strength. 

Butterfly Spread: A three-legged spread in futures or options. In the option spread, the options have the same expiration date but differ in strike prices. For example, a butterfly spread in soybean call options might consist of two short calls at a $6.00 strike price, one long call at a $6.50 strike price, and one long call at a $5.50 strike price. 

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

Buyer's Call: See Call. 

Buyer's Market: A condition of the market in which there is an abundance of goods available and hence buyers can afford to be selective and may be able to buy at less than the price that previously prevailed. See Seller's Market. 

Buying Hedge (or Long Hedge): Hedging transaction in which futures contracts are bought to protect against possible increases in the cost of commodities. See Hedging. 

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 open price range.

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

Call: (1) A period at the opening and the close of some futures markets in which the price for each futures contract is established by auction; (2) Buyer's Call generally applies to cotton, also called "call sale." A purchase of a specified quantity of a specific grade of a commodity at a fixed number of points above or below a specified delivery month futures price with the buyer allowed a period of time to fix the price either by purchasing a 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 but not the obligation to purchase the commodity or to enter into a long futures position; and (5) the requirement that a financial instrument be returned to the issuer prior to maturity, with principal and accrued interest paid off upon return. 

Call Cotton: Cotton bought or sold on call. See Call. 

Called: Another term for "exercised" when the option is a call. The writer of a call must deliver the indicated underlying commodity when the option is exercised or called. 

Call Option: A contract that entitles the buyer/taker to buy a fixed quantity of commodity at a stipulated basis or striking price at any time up to the expiration of the option. The buyer pays a premium to the seller/grantor for this contract. A call option is bought with the expectation of a rise in prices. See Put Option. 

Call Rule: An exchange regulation under which an official bid price for a cash commodity is competitively established at the close of each day's trading. It holds until the next opening of the exchange. 

Capping: Effecting commodity or security transactions shortly prior to an option's expiration date depressing or preventing a rise in the price of the commodity or security so that previously written call options will expire worthless and the premium the writer received will be protected. 

Carrying Broker: A member of a commodity exchange, usually a futures commission merchant, through whom another broker or customer elects to clear all or part of its trades. 

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. 

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

Cash Forward Sale: See Forward Contracting. 

Cash Market: The market for the cash commodity (as contrasted to a futures contract), taking the form of: (1) an organized, self-regulated central market (e.g., a 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: A method of settling certain futures or option contracts whereby the seller (or short) pays the buyer (or long) the cash value of the commodity traded according to a procedure specified in the contract. 

CCC: See Commodity Credit Corporation. 

CD: See Certificate of Deposit. 

CEA: See Commodity Exchange Authority. 

Certificate of Deposit (CD): A time deposit with a specific maturity evidenced by a certificate. Large-denomination CDS are typically negotiable. 

CFTC: See Commodity Futures Trading Commission. 

CFO: Cancel Former Order. 

Certificated or Certified Stocks: Stocks of a commodity that have been inspected and found to be of a quality deliverable against futures contracts, stored at the delivery points designated as regular or acceptable for delivery by a commodity exchange. In grain, called "stocks in deliverable position." See Deliverable Stocks. 

Changer: A clearing member of both the Mid-America Commodity Exchange (MCE) and another futures exchange who, for a fee, will assume the opposite side of a transaction on the MCE by taking a spread position between the MCE and another futures exchange which trades an identical, but larger, contract. Through this service, the changer provides liquidity for the MCE and an economical mechanism for arbitrage between the two markets. 

Charting: The use of graphs and charts in the technical analysis of futures markets to plot trends of price movements, average movements of price, volume of trading and open interest. See Technical Analysis. 

Chartist: Technical trader who reacts to signals derived from graphs of price movements. 

Cheapest-to-Deliver: Usually refers to the selection of bonds deliverable against an expiring bond futures contract. 

Chooser Option: An option which is transacted in the present but which at some prespecified future date is chosen to be either a put or a call option. 

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

Circuit Breakers: A system of trading halts and price limits on equities and derivative markets designed to provide a cooling-off period during large, intraday market movements. The first known use of the term circuit breaker in this context was in the Report of the Presidential Task Force on Market Mechanisms (January 1988), which recommended that circuit breakers be adopted following the market break of October 1987. 

C.I.F.: Cost, insurance and freight paid to a point of destination and included in the price quoted. 

Class (of options): Options of the same type (i.e., either puts or calls, but not both) covering the same underlying futures contract or physical commodity (e.g., a March call with a strike price of 62 and a May call with a strike price of 58). 

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

Clearing House: An adjunct to, or division of, a commodity exchange through which transactions executed on the floor of the exchange are settled. Also charged with assuring the proper conduct of the exchange's delivery procedures and the adequate financing of the trading. 

Clearing Member: A member of the Clearing House or Association. All trades of a non-clearing member must be registered and eventually settled through a clearing member. 

Clearing Price: See Settlement Price. 

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

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

Closing Price (or Range): The price (or price range) recorded during trading that takes place in the final moments of a day's activity that is officially designated as the "close." 

Combination: Puts and calls held either long or short with different strike prices and expirations. 

Commercial: An entity involved in the production, processing, or merchandising of a commodity. 

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

Commercial Paper: Short-term promissory notes issued in bearer form by large corporations, with maturities ranging from 5 to 270 days. Since the notes are unsecured, the commercial papers market generally is dominated by large corporations with impeccable credit ratings. 

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

Commitments: See Open Interest. 

Commodity Credit Corporation: A government-owned corporation established in 1933 to assist American agriculture. Major operations include price support programs, foreign sales, and export credit programs for agricultural commodities. 

Commodity Exchange Authority: A regulatory agency of the U.S. Department of Agriculture established to administer the Commodity Exchange Act prior to 1975; the predecessor of the Commodity Futures Trading Commission. 

Commodity Exchange Commission: A commission consisting of the Secretary of Agriculture, Secretary of Commerce, and the Attorney General, responsible for administering the Commodity Exchange Act prior to 1975. 

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

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 (CPO): Individuals or firms in businesses similar to investment trusts or syndicates that solicit or accept funds, securities or property for the purpose of trading commodity futures contracts or commodity options. 

Commodity Price Index: Index or average, which may be weighted, of selected commodity prices, intended to be representative of the markets in general or a specific subset of commodities (for example, grains or livestock). 

Commodity Trading Advisor (CTA): Individuals or firms that, for pay, issue analyses or reports concerning commodities, including the advisability of trading in commodity futures or options. 

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. 

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 term of reference describing 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: Those grades of a commodity which have been officially approved by an exchange as deliverable in settlement of a futures contract. 

Contract Market: (1) A board of trade or exchange designated by the Commodity Futures Trading Commission to trade futures or options under the Commodity Exchange Act; (2) Sometimes the futures contract itself (e.g., corn is a contract market). 

Contract Month: See Delivery Month. 

Contract Unit: The actual amount of a commodity represented in a contract. 

Controlled Account: Any account for which trading is directed by someone other than the owner. Also called a Managed Account or a Discretionary Account. 

Convergence: The tendency for prices of physicals and futures to approach one another, usually during the delivery month. Also called a "narrowing of the basis."

Conversion: When trading options on futures contracts, a position created by selling a call option, buying a put option, and buying the underlying futures contract, where the options have the same strike price and the same expiration.

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

Corn-Hog Ratio: See Feed Ratio. 

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): A fixed dollar amount of interest payable per annum, stated as a percentage of principal value, usually payable in semiannual installments. 

Cover: (1) Purchasing futures to offset a short position. Same as Short Covering. See Offset, Liquidation; (2) To have in hand the physical commodity when a short futures or leverage sale is made, or to acquire the 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 commodity. For example, in the case of options on futures contracts, a covered call is a short call position combined with a long futures position. A covered put is a short put position combined with a short futures position. 

Cox-Ross-Rubinstein Option Pricing Model: An option pricing logarithm developed by J. Cox, S. Ross and M. Rubinstein which can be adopted to include effects not included in the Black-Scholes model (e.g., early exercise and price supports). 

CPO: See Commodity Pool Operator. 

Crack: 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 Year: The time period from one harvest to the next, varying according to the commodity (i.e., July 1 to June 30 for wheat; September 1 to August 31 for soybeans). 

Cross-Hedge: Hedging a cash market position in a futures contract for a different but price-related commodity. 

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.

CTA: See Commodity Trading Advisor.

CTI Codes: Customer Type Indicator codes. These consist of four identifiers which describe transactions by the type of customer for which a trade is effected.. The four codes are: (1) trading for the member's own account; (2) trading for a proprietary account of the clearing member's firm; (3) trading for another member who is currently present on the trading floor or for an account controlled by such other member; and (4) trading for any other type of customer. Transaction data classified by the above codes are included in the trade register report produced by a clearing organization. 

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). 

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

Day Traders: 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 by a floor broker. 

Declaration Date: See Expiration Date. 

Declaration (of Options): See Exercise. 

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

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

Deliverable Grades: See Contract Grades. 

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

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

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 delivery. 

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

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

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

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

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

Delta: See Delta Value. 

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

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

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

Depository Receipt: See Vault Receipt. 

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

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

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

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

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

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

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

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

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

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. 

DSRO: See Designated Self Regulatory Organization. 

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

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

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

ECU: See European Currency Unit. 

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

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

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

Equity: The residual dollar value of a futures, option, or leverage trading account, assuming it was 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). 

Eurodollar: U.S. dollar deposits placed with banks outside the U.S. Holders may include individuals, companies, banks and central banks. 

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. 

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

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

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

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

Extrinsic Value: See Time Value. 

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

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

Fannie Mae: See Federal National Mortgage Association. 

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

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

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

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

FIA: See Futures Industry Association. 

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

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

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

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

Fix, Fixing: See Gold Fixing. 

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

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

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

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

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

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

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

Forward: In the future. 

Forwardation: See Contango. 

Forward Contracting: 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: Study of basic, underlying factors which will affect the supply and demand of the commodity being traded in futures contracts. 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: See Futures Contract. 

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

Futures Contract: An agreement to purchase or sell a commodity 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-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 Industry Association (FIA): A membership organization for futures commission merchants (FCMs) which, among other activities, offers education courses on the futures markets, disburses information and lobbies on behalf of its members. 

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

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

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

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

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

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

GPM: See Gross Processing Margin. 

Grades: Various qualities of a commodity. 

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

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

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

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

GTC: See Good 'Til Canceled order. 

GTW: See Good This Week order.

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 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. 

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. 

Hog-Corn Ratio: See Feed Ratio. 

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.

IB: See Introducing Broker. 

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

Initial Deposit: See Initial Margin. 

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

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

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

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

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

Intermarket Spread: See Spread and Intercommodity Spread. 

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

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

Intracommodity Spread: See Spread and Interdelivery Spread. 

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

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

Inverted Market: A futures market in which the nearer months are selling at prices higher than the more distant months; a market displaying "inverse carrying charges," characteristic of markets with supply shortages. See Backwardation. 

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

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

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

Kerb Trading or Dealing: See Curb Trading. 

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