Glosssary

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

"A"

Actuals

See Cash Commodity.

Aggregation

The policy under which all futures positions owned or controlled by one trader
or a group of traders are combined to determine reportable positions and speculative
limits.

Arbitrage

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

Arbitration

The process of settling disputes between parties by a person or persons chosen
or agreed to by them. NFA’s arbitration program provides a forum for resolving
futures-related disputes between NFA Members or between Members and customers.

Associated Person (AP)

An individual who solicits orders, customers or customer funds on behalf of
a Futures Commission Merchant, an Introducing Broker, a Commodity Trading Advisor
or a Commodity Pool Operator and who is registered with the Commodity Futures
Trading Commission.

At-the-Money Option

An option whose strike price is equal—or approximately equal—to
the current market price of the underlying futures contract."B"

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"B"

Backwardation

A futures market in which the relationship between two delivery months of the
same commodity is abnormal. The opposite of Contango.
See also Inverted Market.

Basis

The difference between the current cash price of a commodity and the futures
price of the same commodity.

Bear Market (Bear/Bearish)

A market in which prices are declining. A market participant who believes prices
will move lower is called a “bear.”A news item is considered bearish
if it is expected to result in lower prices.

Bid

An expression of willingness to buy a commodity at a given price; the opposite of Offer.

Board of Trade

See Contract Market.

Broker

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

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.

Bull Market (Bull/Bullish)

A market in which prices are rising. A market participant who believes prices
will move higher is called a “bull.” A news item is considered bullish
if it is expected to result in higher prices.

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"C"

Call Option

An option which gives the buyer the right, but not the obligation, to purchase
(“go long”) the underlying futures contract at the strike price
on or before the expiration date.

Carrying Broker

A member of a futures exchange, usually a clearinghouse member, through which
another firm, broker or customer chooses to clear all or some trades.

Carrying Charge

The cost of storing a physical commodity, such as grain or metals, over a period
of time. The carrying charge includes insurance, storage and interest on the
invested funds as well as other incidental costs. In interest rate futures markets,
it refers to the differential between the yield on a cash instrument and the
cost of the funds necessary to buy the instrument. Also referred to as Cost
of Carry.

Cash Commodity

The actual physical commodity as distinguished from the futures contract based
on the physical commodity. Also referred to as Actuals.

Cash Market

A place where people buy and sell the actual commodities (i.e., grain elevator,
bank, etc.).
See also Forward (Cash) Contract and Spot.

Cash Settlement

A method of settling certain futures or options contracts whereby the market
participants settle in cash (rather than delivery of the commodity).

Charting

The use of graphs and charts in the technical analysis of futures markets to
plot price movements, volume, open interest or other statistical indicators
of price movement.
See also Technical Analysis.

Churning

Excessive trading that results in the broker deriving a profit from commissions
while disregarding the best interests of the customers.

Circuit Breaker

A system of trading halts and price limits on equities and derivatives markets
designed to provide a cooling-off period during large, intraday market declines.

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.

Clearinghouse

An agency or separate corporation of a futures exchange that is responsible
for settling trading accounts, collecting and maintaining margin monies, regulating
delivery and reporting trade data. The clearinghouse becomes the buyer to each
seller (and the seller to each buyer) and assumes responsibility for protecting
buyers and sellers from financial loss by assuring performance on each contract.

Clearing Member

A member of an exchange clearing house responsible for the financial commitments
of its customers. All trades of a non-clearing member must be registered and
eventually settled through a clearing member.

Closing Price

See Settlement Price.

Closing Range

A range of prices at which futures transactions took place during the close
of the market.

Commission

See Futures Commission Merchant.

Commodity Exchange Act (CEA)

The federal act that provides for federal regulation of futures trading.

Commodity Futures Trading Commission (CFTC)

The federal regulatory agency established in 1974 that administers the Commodity
Exchange Act. The CFTC monitors the futures and options on futures markets in
the United States.

Commodity Pool

An enterprise in which funds contributed by a number of persons are combined
for the purpose of trading futures or options contracts. The concept is similar
to a mutual fund in the securities industry. Also referred to as a Pool.

Commodity Pool Operator (CPO)

An individual or organization which operates or solicits funds for a commodity
pool. A CPO is generally required to be registered with the CFTC.

Commodity Trading Advisor (CTA)

A person who, for compensation or profit, directly or indirectly advises others
as to the advisability of buying or selling futures or commodity options. Providing
advice includes exercising trading authority over a customer’s account.
A CTA is generally required to be registered with the CFTC.

Confirmation Statement

A statement sent by a Futures Commission Merchant to a customer when a futures
or options position has been initiated. The statement shows the price and the
number of contracts bought or sold. Sometimes combined with a Purchase and Sale
Statement.

Contango

A futures market in which prices in succeeding delivery months are progressively
higher. The opposite of Backwardation.

Contract Market

A board of trade designated by the CFTC to trade futures or options contracts
on a particular commodity. Commonly used to mean any exchange on which futures
are traded. Also referred to as an Exchange.

Contract Month

The month in which delivery is to be made in accordance with the terms of the
futures contract. Also referred to as Delivery Month.

Convergence

The tendency for prices of physical commodities and futures to approach one
another, usually during the delivery month.

Cost of Carry

See Carrying Charge.

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.

Cross-Hedging

Hedging a cash commodity using a different but related futures contract when
there is no futures contract for the cash commodity being hedged and the cash
and futures market follow similar price trends (e.g., using soybean meal futures
to hedge fish meal).

Customer Segregated Funds

See Segregated Account.

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"D"

Day Order

An order that if not executed expires automatically at the end of the trading
session on the day it was entered.

Day Trader

A speculator who will normally initiate and offset a position within a single
trading session.

Default

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

Deferred Delivery Month

The distant delivery months in which futures trading is taking place, as distinguished
from the nearby futures delivery month.

Delivery

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

Delivery Month

See Contract Month.

Derivative

A financial instrument, traded on or off an exchange, the price of which is
directly dependent upon the value of one or more underlying securities, equity
indices, debt instruments, commodities, other derivative instruments, or any
agreed upon pricing index or arrangement. 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 a fixed rate of return.

Designated Self-Regulatory Organization (DSRO)

When a Futures Commission Merchant (FCM) is a member of more than one Self-Regulatory
Organization (SRO), the SROs may decide among themselves which of them will
be primarily responsible for enforcing minimum financial and sales practice
requirements. The SRO will be appointed DSRO for that particular FCM. NFA is
the DSRO for all nonexchange member FCMs.
See also Self-Regulatory Organization.

Disclosure Document

The statement that must be provided to prospective customers that describes
trading strategy, fees, performance, etc.

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 is trading at a discount to May,”
indicating that the price of the July future is lower than that of May; (3)
applied to cash grain prices that are below the futures price.

Discretionary Account

An arrangement by which the owner of the account gives written power of attorney
to someone else, usually the broker or a Commodity Trading Advisor, to buy and
sell without prior approval of the account owner. Also referred to as a Managed
Account.

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) a Futures Commission Merchant 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 day.

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"E"

Electronic Order

An order placed electronically (without the use of a broker) either via the
Internet or an electronic trading system.

Electronic Trading Systems

Systems that allow participating exchanges to list their products for trading
after the close of the exchange’s open outcry trading hours (i.e., Chicago
Board of Trade’s Project A, Chicago Mercantile Exchange’s GLOBEX
and New York Mercantile Exchange’s ACCESS.)

Equity

The value of a futures trading account if all open positions were offset at
the current market price.

Exchange

See Contract Market.

Exchange for Physicals (EFP)

A transaction generally used by two hedgers who want to exchange futures for
cash positions. Also referred to as Against Actuals or Versus Cash.

Exercise

The action taken by the holder of a call option if he wishes to purchase the
underlying futures contract or by the holder of a put option if he wishes to
sell the underlying futures contract.

Exercise Price

See Strike Price.

Expiration Date

Generally the last date on which an option may be exercised. It is not uncommon
for an option to expire on a specified date during the month prior to the delivery
month for the underlying futures contracts.

Extrinsic Value

See Time Value.

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"F"

First Notice Day

The first day on which notice of intent to deliver a commodity in fulfillment
of an expiring futures contract can be given to the clearinghouse by a seller
and assigned by the clearing-house to a buyer. Varies from contract to contract.

Floor Broker

An individual who executes orders on the trading floor of an exchange for any
other person.

Floor Trader

An individual who is a member of an exchange and trades for his own account
on the floor of the exchange.

Forward (Cash) Contract

A contract which requires a seller to agree to deliver a specified cash commodity
to a buyer sometime in the future. All terms of the contract are customized,
in contrast to futures contracts whose terms are standardized. Forward contracts
are not traded on exchanges.

Frontrunning

A process whereby a futures or options position is taken based on non-public
information about an impending transaction in the same or related futures or
options contract.

Fully Disclosed

An account carried by a Futures Commission Merchant in the name of an individual
customer; the opposite of an Omnibus Account.

Fundamental Analysis

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

Futures Commission Merchant (FCM)

An individual or organization that solicits or accepts orders to buy or sell
futures contracts or commodity options and accepts money or other assets from
customers in connection with such orders. An FCM must be registered with the
CFTC.

Futures Contract

A legally binding agreement to buy or sell a commodity or financial instrument
at a later date. Futures contracts are standardized according to the quality,
quantity and delivery time and location for each commodity. The only variable
is price.

Futures Industry Association (FIA)

The national trade association for Futures Commission Merchants.

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"G"

Grantor

A person who sells an option and assumes the obligation to sell (in the case
of a call) or buy (in the case of a put) the underlying futures contract at
the exercise price. Also referred to as an Option Seller or Writer.

Guaranteed Introducing Broker

A firm or individual that solicits and accepts commodity futures orders from
customers but does not accept money, securities or property from the customer.
A Guaranteed Introducing Broker has a written agreement with a Futures Commission
Merchant that obligates the FCM to assume financial and disciplinary responsibility
for the performance of the Guaranteed Introducing Broker in connection with
futures and options customers. Therefore, unlike an Independent Introducing
Broker, a Guaranteed Introducing Broker must introduce all accounts to its guarantor
FCM but is not subject to minimum financial requirements. All Introducing Brokers
must be registered with the CFTC.

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"H"

Hedging

The practice of offsetting the price risk inherent in any cash market position
by taking an equal but opposite position in the futures market. A long hedge
involves buying futures contracts to protect against possible increasing prices
of commodities. A short hedge involves selling futures contracts to protect
against possible declining prices of commodities.

High

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

Holder

The purchaser of either a call or put option. Option buyers receive the right,
but not the obligation, to assume a futures position. The opposite of a Grantor.
Also referred to as the Option Buyer.

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"I"

In-the-Money Option

An option that has intrinsic value.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.

Independent Introducing Broker

A firm or individual that solicits and accepts commodity futures orders from
customers but does not accept money, securities or property from the customer.
Unlike a Guaranteed Introducing Broker, an Independent Introducing Broker is
subject to minimum capital requirements and can introduce accounts to any registered
Futures Commission Merchant.

Initial Margin

The amount a futures market participant must deposit into a margin account at
the time an order is placed to buy or sell a futures contract

See also Margin.

Intrinsic Value

The amount by which an option is in-themoney.

Introducing Broker (IB)

See Guaranteed Introducing Broker and Independent Introducing Broker.

Inverted Market

See Backwardation.

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"L"

Last Trading Day

The last day on which trading may occur in a given futures or option.

Leverage

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

Limit

See Position Limit, Price Limit, Variable Limit.

Liquidate

To take a second futures or options position opposite to the initial or opening
position. To sell (or purchase) futures contracts of the same delivery month
purchased (or sold) during an earlier transaction or make (or take) delivery
of the cash commodity represented by the futures market. Also referred to as
Offset.

Liquidity (Liquid Market)

A characteristic of a security or commodity market with enough units outstanding
to allow large transactions without a substantial change in price.

Local

A member of an exchange who trades for his own account or fills orders for customers.

Long

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

Low

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

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"M"

Maintenance Margin

A set minimum margin (per outstanding futures contract) that a customer must
maintain in his margin account to retain the futures position.
See also Margin.

Managed Account

See Discretionary Account.

Managed Funds Association (MFA)

The trade association for the managed funds industry.

Margin

An amount of money deposited by both buyers and sellers of futures contracts
and by sellers of options contracts to ensure performance of the terms of the
contract (the making or taking delivery of the commodity or the cancellation
of the position by a subsequent offsetting trade). Margin in commodities is
not a down payment, as in securities, but rather a performance bond.
See also Initial Margin, Maintenance Margin and Variation Margin.

Margin Call

A call from a clearinghouse to a clearing member, or from a broker or firm to
a customer, to bring margin deposits up to a required minimum level.

Mark-to-Market

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

Market Order

An order to buy or sell a futures or options contract at whatever price is obtainable
when the order reaches the trading floor.

Maximum Price Fluctuation

See Price Limit.

Mediation

A voluntary process in which the parties to a futures-related dispute work with
a neutral third party to find a mutually acceptable solution.

Minimum Price Fluctuation

See Tick.

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"N"

Naked Option

See Uncovered Option.

National Futures Association (NFA)

Authorized by Congress in 1974 and designated by the CFTC in 1982 as a “registered
futures association,” NFA is the industrywide self-regulatory organization
of the futures industry.

National Introducing Brokers Association (NIBA)

NIBA is a non-profit organization for guaranteed and independent introducing
brokers.

Nearby Delivery Month

The futures contract month closest to expiration. Also referred to as the Spot
Month.

Net Asset Value

The value of each unit of participation in a commodity pool. Basically a calculation
of assets minus liabilities plus or minus the value of open positions when marked
to the market, divided by the total number of outstanding units.

Net Performance

An increase or decrease in net asset value exclusive of additions, withdrawals
and redemptions.

Notice Day

Any day on which a clearinghouse issues notices of intent to deliver on futures
contracts.

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"O"

Offer

An indication of willingness to sell a futures contract at a given price; the
opposite of Bid.

Offset

See Liquidate.

Omnibus Account

An account carried by one Futures Commission Merchant (FCM) with another FCM
in which the transactions of two or more persons are combined and carried in
the name of the originating FCM rather than of the individual customers; the
opposite of Fully Disclosed.

Open

The period at the beginning of the trading session officially designated by
the exchange during which all transactions are considered made “at the
open.”

Open Interest

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

Open Outcry

A method of public auction for making bids and offers in the trading pits of
futures exchanges.

Open Trade Equity

The unrealized gain or loss on open positions.

Opening Range

The range of prices at which buy and sell transactions took place during the
opening of the market.

Option Buyer

See Holder.

Option Contract

A contract which gives the buyer the right, but not the obligation, to buy or
sell a specified quantity of a commodity or a futures contract at a specific
price within a specified period of time. The seller of the option has the obligation
to sell the commodity or futures contract or buy it from the option buyer at
the exercise price if the option is exercised.
See also Call Option and Put Option.

Option Premium

The price a buyer pays (and a seller receives) for an option. Premiums are arrived
at through open outcry. There are two components in determing this price—extrinsic
(or time) value and intrinsic value.

Option Seller

See Grantor.

Out-of-the-Money Option

A call option with a strike price higher or a put option with a strike price
lower than the current market value of the underlying asset, (i.e., an option
that does not have any intrinsic value).

Out Trade

A trade which cannot be cleared by a clearinghouse because the data submitted
by the two clearing members involved in the trade differs in some respect. All
out trades must be resolved before the market opens the next day.

Over-the-Counter Market (OTC)

A market where products such as stocks, foreign currencies and other cash items
are bought and sold by telephone and other electronic means of communication
rather than on a designated futures exchange.

Overbought

A technical opinion that the market price has risen too steeply and too fast
in relation to underlying fundamental factors.

Oversold

A technical opinion that the market price has declined too steeply and too fast
in relation to underlying fundamental factors.

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"P"

Par

The face value of a security.

Pit

The area on the trading floor where trading in futures or options contracts
is conducted by open outcry.

Pool

See Commodity Pool.

Position

A commitment, either long or short, in the market.

Position Limit

The maximum number of speculative futures contracts one can hold as determined
by the CFTC and/or the exchange where the contract is traded.

Position Trader

A trader who either buys or sells contracts and holds them for an extended period
of time, as distinguished from a day trader.

Prearranged Trading

Trading between brokers in accordance with an expressed or implied agreement
or understanding. Prearranged trading is a violation of the Commodity Exchange
Act.

Premium

Refers to (1) the amount a price would be increased to purchase a better quality
commodity; (2) a futures delivery month selling at a higher price than another;
(3) cash prices that are above the futures price; (4) the price paid by the
buyer of an option; or (5) the price received by the seller of an option.

Price Discovery

The process of determining the price of a commodity by trading conducted in
open outcry at an exchange.

Price Limit

The maximum advance or decline, from the previous day’s settlement price,
permitted for a futures contract in one trading session. Also referred to as
Maximum Price Fluctuation.

Purchase and Sale Statement (P&S)

A statement sent by a Futures Commission Merchant to a customer when a futures
or options position has been liquidated or offset. The statement shows the number
of contracts bought or sold, the prices at which the contracts were bought or
sold, the gross profit or loss, the commission charges and the net profit or
loss on the transaction. Sometimes combined with a Confirmation Statement.

Put Option

An option that gives the buyer the right, but not the obligation, to sell the
underlying futures contracts at a particular price (strike or exercise price)
on or before a particular date.

Pyramiding

The use of unrealized profits on existing futures positions as margin to increase
the size of the position, normally in successively smaller increments.

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"Q"

Quotation

The actual price or the bid or ask price of either cash commodities or futures
or options contracts at a particular time.

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"R"

Range

The difference between the high and low price of a commodity during a given
trading session, week, month, year, etc.

Regulations (CFTC)

The regulations adopted and enforced by the CFTC in order to administer the
Commodity Exchange Act.

Reparations

The term is used in conjunction with the CFTC’s customer claims procedure
to recover civil damages.

Reportable Positions

The number of open contracts specified by the CFTC when a firm or individual
must begin reporting total positions by delivery month to the authorized exchange
and/or the CFTC.

Round Turn

A completed futures transaction involving both a purchase and a liquidating
sale, or a sale followed by a covering purchase.

Rules (NFA)

The standards and requirements to which participants who are required to be
Members of National Futures Association must subscribe and conform.

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"S"

Scalper

A trader who trades for small, short-term profits during the course of a trading
session, rarely carrying a position overnight.

Segregated Account

A special account used to hold and separate customers’ assets from those
of the broker or firm.

Self-Regulatory Organization (SRO)

Self-regulatory organizations (i.e., the futures exchanges and National Futures
Association) enforce minimum financial and sales practice requirements for their
members.
See also Designated Self-Regulatory Organization.

Settlement Price

The last price paid for a futures contract on any trading day. Settlement prices
are used to determine open trade equity, margin calls and invoice prices for
deliveries.

Short

One who has sold futures contracts or plans to purchase a cash commodity (e.g.,
a food processor).

Speculator

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

Spot

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

Spot Month

See Nearby Delivery Month.

Spreading

The simultaneous buying and selling of two related markets or commodities in
the expectation that a profit will be made when the position is offset.

Stop Order

An order that becomes a market order when the futures contract reaches a particular
price level. A sell stop is placed below the market, a buy stop is placed above
the market.

Strike Price

The price at which the buyer of a call (put) option may choose to exercise his
right to purchase (sell) the underlying futures contract. Also called Exercise
Price.

Swap

In general, the exchange of one asset or liability for a similar asset or liability
for the purpose of lengthening or shortening maturities, or raising or lowering
coupon rates, to maximize revenue or minimize financing costs.

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"T"

Technical Analysis

An approach to analysis of futures markets which examines patterns of price
change, rates of change, and changes in volume of trading, open interest and
other statistical indicators.
See also Charting.

Tick

The smallest allowable increment of price movement for a futures contract. Also
referred to as Minimum Price Fluctuation.

Time Value

The amount of money options buyers are willing to pay for an option in anticipation
that over time a change in the underlying futures price will cause the option
to increase in value. In general, an option premium is the sum of time value
and intrinsic value.Any amount by which an option premium exceeds the option’s
intrinsic value can be considered time value. Also referred to as Extrinsic
Value.

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"U"

Uncovered Option

A short call or put option position which is not covered by the purchase or
sale of the underlying futures contract or physical commodity. Also referred
to as a Naked Option.

Underlying Futures Contract

The specific futures contract that the option conveys the right to buy (in case
of a call) or sell (in the case of a put).

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"V"

Variable Limit

A price system that allows for larger than normal allowable price movements
under certain conditions. In periods of extreme volatility, some exchanges permit
trading at price levels that exceed regular daily price limits.

Variation Margin

Additional margin required to be deposited by a clearing member firm to the
clearinghouse during periods of great market volatility or in the case of high-risk
accounts.

Volatility

A measurement of the change in price over a given time period.

Volume

The number of purchases and sales of futures contracts made during a specified
period of time, often the total transactions for one trading day

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"W"

Warehouse Receipt

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

Wire House

See Futures Commission Merchant.

Writer

See Grantor.

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"Y"

Yield

A measure of the annual return on an investment.

Yield Curve

A chart in which yield level is plotted on the vertical axis, and the term to
maturity of debt instruments of similar creditworthiness is plotted on the horizontal
axis.

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