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Actual physical commodities as distinguished from futures contracts

AFEIS

Australian Futures Exchange Information Services Pty Ltd

Arbitrage

Involves a purchase in one market and a sale in a different market or different commodity to capitalise on what appear to be temporary distortions in price. Riskless (or almost riskless) arbitrage involves delivery of the actual commodity, but the term is also used to refer to any trading between markets aimed at profiting from price discrepancies. (see SPREAD)

Arbitration

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

At the Market

Orders to buy or sell "at the market" require a prompt execution of the order when it reaches the trading floor at the best possible price.

Automatic Exercise

Exercise by Clearing House of an "in-the-money" option at expiration.

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Backwardation 

Market situation in which prices are progressively lower in the future delivery months than in the nearest delivery month. For instance, if the Wool quotation for March is $4.80 per kg and that for July is $4.50 per kg.

Basis

The price difference between the actual or spot commodity and the futures market

Basis Grae

Grade of a commodity used as the standard of the futures contract

Basis Point

One per cent of one per cent (0.01%)

Bear

One who expects a decline in prices (the opposite of "bull")

Bear Covering

The act of buying back a speculative short position on a steady or rising market, despite the original intention to await

Bear Market

Any market in which prices are in a declining trend.

Bearish and Bullish

When conditions suggest lower prices a bearish situation is said to exist. If higher prices appear warranted the situation is said to be bullish.

Beta (or Beta Coefficient)

A statistical measurement of the relationship between the risk of an individual stock or stock portfolio and the risk of the overall market. The Beta of a stock or portfolio measures the volatility of that stock or portfolio relative to the volatility of the overall market. The market has a Beta of 1.0

Bid

An offer to buy, subject to immediate acceptance unless otherwise indicated, a definite quantity of a commodity at the (bid) price stated.

Break

A sharp decline or a sharp rise in price, usually after a sustained period of little or no movement.

Broker

A Registered Representative, Account Executive or a floor broker given responsibility for the acceptance and/or execution of an order.

Brokerage

The fee charged by a broker for execution of a transaction

Bull

One who expects a rise in prices (The opposite of "bear")

Bull Market

A market in which prices are in an upward trend.

Buy a Contract

Enter into a futures contract to buy a specified commodity.

Buy Back

An offsetting purchase to "cover" or liquidate a short sale.

Buy on Opening

To buy at the beginning of a trading sesion at a price within the opening price range.

Buyers 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 prices that had previously prevailed.

Buying Hedge (or long hedge)

Hedging transaction in which futures contracts are bought to protect against possible increased cost of commodities. See also HEDGING.

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A designated buying and selling period resembling an auction whereby trading is conducted in order to establish a price or price range for a particular time.

Call Option

An option to take a bought futures position at a predetermined price.

Carrying Charge

The expense, such as storage charges, insurance, interest charge, and other incidental costs involved in ownership of stored physical commodities over a period of time. May be reflected in futures contracts by successively higher prices for each succeeding future month in so-called "normal" or contango markets.

Cash and Carry

Buying the physical commodity or instrument, holding it and later delivering it against sold futures contracts. An arbitrage transaction used to profit from pricedifferences between the cash market and the futures market. In markets where there is no delivery, a simulated cash and carry is achieved by buying the physical, selling futures and later reversing both transactions.

Cach Commodity

The actual physical commodity as distinguished from futures contracts. Sometimes called "spot commodity".

Cash Market

Market for immediate delivery of and payment for commodities.

Cash Price

The price in the market place for actual cash or spot commodities to be delivered via customary market channels.

Cash Settlement

A procedure for settlement of contracts by automatic close-out at a cash price designated by the Clearing House in futures markets which make no provision for delivery, eg. SPI200

Clearing

The process of matching, registering and guaranteeing transactions.

Clearing Contracts

The process of substituting principals to transactions through the operation of the Clearing House.

Clearing House

A body which guarantees the fulfilment between Clearing Members of all contracts traded on the Exchange. The Clearing House holds all deposit and margin requirements of the Clearing Members who have to cover their commitment with the Clearing House on a day to day basis. The Clearing House handles all cash settlement within the market and provides the documentation necessary to record all business.

Clearing Member

A member of the Clearing House to whom fulfilment of all contracts, registered in their own name, is guaranteed.

Close Out

To liquidate a position of fulfil an obligation by taking an equal and opposite position eg. a trader who has bought a futures contract, would close-out, or get out of the contract, by taking out a contract to sell.

Commission

The fee made by a broker for buying or selling commodities in the futures or cash market.

Contango

Market situation in which prices are progressively higher in the futures delivery months than in the nearest delivery month. For instance, if the Wool quotation stands at $4.50 per kg, for March and at $4.80 per kg for July, then the Contango for five months (against March as a basis) is $0.30 per kg. (Contango is the opposite of Backwardation).

Conctract

A term of reference describing a unit of trading for a commodity future. Also an actual bilateral agreement between buyer and seller.

Contract Month

The month in which delivery or cash settlement is to be made in accordance with a futures contract.

Contract Note

see TRADING ADVICE

Contract Unit

The actual amount of a commodity designated in a given futures contract.

Convergence

A term referring to cash and futures prices tending to come together (ie. the basis apporaches zero) as the futures contract nears expiration.

Coupon

The annual rate of interest that a bond guarantees to pay, based on the bond's face value. see also YIELD

Cover

To cancel a short position in any future by the purchase of an equal quantity of the same future. Also known as short covering.

Cross

To buy and sell simultaneously in the same contract month for the same commodity.

Current Delivery (month)

The futures contract which matures and becomes deliverable during the present month; also called spot month.

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Daily Average

Used to describe typical trading activity for a day. For example, daily average volume over a year is calculated by the annual volume divided by the total number of working days in that year.

Day Orders

Orders which automatically expire at the close of the day's trading if not filled during the day on which they are received.

Day Trading 

Establishing and liquidating the same futures market position within one day.

Deals

Refers to an executed trade. All deals are expressed as  "round-turn", unless referring to deals executed by a Member or Local, which are usually expressed in "sides".

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.

Deliverable Types

These refer to the actual types or grades of physical commodity which may be delivered under Exchange rules in settlement of a futures contract.

Delivery

The tender and receipt of the actual commodity, or warehouse receipts covering such commodity, in settlement of a futures contract. Note that in some commodities no delivery provision exists but settlement is made in cash.

Delivery Month

A specified month during which actual delivery of the commodity may be made under terms of a futures contract. Each futures contract must state the month of delivery. Current delivery means delivery during the current month. Note that in some commodities no delivery provision exists but settlement is made in cash.

Delta

The change in the value of the option premium relative to the change in the value of the underlying futures, expressed as a coefficient.

Deposit

The Clearing House determines a minimum deposit, initial margin on all contracts traded on the market. This deposit must be paid by the client to the Floor Member and is then lodged by the Floor Member with the Clearing House. Also known as INITIAL MARGIN.

Differentials

The discounts allowed for grades of a commodity lower than the futures basic grade, and also the premiums paid for grades better than the futures basic grade.

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 the discount to May", indicating that the price of the July future is lower than that of May; see PREMIUM.

Discretionary Account

A trading account over which the client gives a broker authority to effect transactions in futures contracts or options without prior reference to or approval of that client.

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EFP

An Exchange For Physical (EFP) is the undertaking of a physical transaction in conjunction with an offsetting futures transaction with the same counterparty, at a price negotiated between the counterparties. EFP's are not transacted on the Floor of the Exchange and therefore do not have to be traded within the current market bid and offer and are thus ommitted from the calculation of first, high, low and last prices.

Equity

The residual dollar value of a futures trading account assuming it were liquidated at the going prices of the markets involved.

Exchange Traded Option

An option to take up a futures position. This type of option has standardised exercise prices set by the Exchange, enabling transfer of option positions to third parties.

Exercise price (Strike price)

The price at which the buyer of a call option can purchase a futures contract during the life of the option, or the price at which the buyer of a put option can sell a futures contract during the life of the option.

Execution by "open outcry"

The established practice on the Exchange of executing orders in the trading pit by verbal offer and acceptance.

Expiry month

A specified month during which the futures contract expires and actual delivery of the commodity takes place, or settlement is made in cash.

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Financial instruments

There are two basic types: (1) a debt instrument, which is a loan with an agreement to pay back funds with interest; and (2) an equity security, which is a share or stock in a company.

First notice day

The first day on which notices of intention to deliver actual commodities against futures market positions can be received. First notice day will vary with each commodity and exchange.

Floor member

Floor Members are the Brokers represented on the Exchange Trading Floor. These Members operate free of commission and act for themselves or their clients who are charged a commission.

Floor trader

A registered employee of a Floor Member who transacts all business for that Floor Member on the trading floor of the Exchange. Also called a market representative.

F/O

A Futures/Options spread transaction (F/O) is the undertaking of a simultaneous futures and options transaction, with the same counterparty, which creates a delta neutral hedge position. The futures and options sides of a F/O trade are executed in the respective Options Pit and the price of the futures side of the trade must be within the current bid and offer in the corresponding Futures Pit.

Forward

In the future.

Fordwardation

See Contango

Forward purchase or sale

A purchase or sale of an actual commodity for deferred delivery, not necessarily on a futures market.

Futures

The term applied to trading in identical contracts for delivery of a commodity at a future date. All futures trading in the same contract involve the same unit of trading. All futures trading is subject to the rules of the Exchange where the trades are made, and consequently the terms of all trades completed in any commodity on that Exchange in the same delivery month are identical.

Futures price

The price of a given commodity unit determined by open outcry on a futures exchange.

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Give-up

This term is used to represent the business that is traded by a Local Member on behalf of a Floor Member.

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Hedge

Take a position(ie. buy or sell)in the futures market as a means of reducing the risk of price fluctuation in the physical market.

High

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

Historic Volatility

Is an annualised standard deviation of daily changes in the price of the underlying futures contract.

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Implied volatility

Refers to central volatility as supplied by market participants at the close of business each day.

Initial margin

See DEPOSIT

In-the-month

A call option with a striking price lower (or a Put option with striking price higher) than the current market value of the underlying futures contract, ie. an option which is profitable to exercise.

Inter-commodity rate

Concessional rate for specified pairs of commodities.

Inter-month rate

Rate that applies to the futures equivalent of any options and futures position against any options and futures position in different delivery months for the same commodity.

Interest rate commodities

Includes the 90 Day Bank Bill, 3 Year Treasury Bond and 10 year Treasury Bond contracts.

Inverted market

A market in which prices for distant futures are below the prices of the nearer futures. See BACKWARDATION

ITC

SFE real-time market information is transmitted in the Interexchange Technical Committee high speed quotation line specification. This is an extremely accurate transmission method which is utilised by the majority of international futures exchanges.

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Last trading day

The final day under an Exchange's rules during which trading  may take place in a particular delivery futures month. Futures contracts outstanding at the end of the last trading day must be settled by delivery of physicals or by cash settlement (see CASH SETTLEMENT).

Leverage

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

Limit

The definite price stated by a customer to a broker restricting the execution of an order to buy for not more than, or sell for not less than, the stated price.

Limit order

An order given to a broker by a customer which has some restriction upon its execution, such as price or time.

Liquid

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

Liquidation

The sale of a previously held long position, or the re-purchase of an earlier established short position. The former is also called a long liquidation, while the latter is referred to as short covering. 

Liquid market

A market where selling and buying can be accomplished with ease because of high volume.

Local

A Member of the Exchange with the authority to deal on the trading floor on his/her own account or for Floor Members but not on behalf of Clients.

Long

A trader who has bought futures contracts or who owns actuals which are unhedged. "Net Long" refers to a trader whose total purchases exceed the total short sales in the trader's open futures contracts.

Lot

Usually a specific quantity of a standard grade of a commodity, or a unit of trading equivalent to one futures contract.

Lotting factor

The average number of lots traded per deal (that is, volume divided by deals).

Low

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

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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. 

Mandatory settlement

Process whereby cash settled futures contracts still open at expiry are closed out by mandatory cash settlement.

Margin

Additional deposit required from a client when the futures price moves against the position, sot that the client would show a loss if the contracts were liquidated at the current price. Under the SFE's rules, brokers must call margins from a client as soon as the client's unrealised loss exceeds 25 per cent of the original deposit. 

Margin call

A communication to a client asking to cover an adverse price movement on a futures position.

Market order

An order to buy or sell futures contracts for immediate execution at best available price.

Minimum price fluctuation

Smallest increment of price movement possible in trading a given futures contract.

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Net position

The difference between the open contracts long and the open contracts short held in any one commodity by an individual or group.

Nominal value

An approximation of the dollar value of traded volume. For interest rate commodities, it is calculated by: (contract face value) x (volume). For equity and agricultural commodities, it is calculated by: (contract face value) x (volume) x (price).

Novation

Novation is the substitution of a new contracting party for an existing contracting party. Such a facility allows complete flexibility to enter or quit the market at will. 

NYMEX

New York Mercantile Exchange Limited.

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A communication indicating a willingness to sell at a given price. Opposite to Bid.

Offset

The procedure by which the long or short position of an individual is liquidated or closed out by an opposite transaction. 

On opening

A term used to specify execution of an order during the opening if possible.

Open interest

See OPEN POSITION

Open outcry

The required method of making all the bids and offers verbally in the trading pit.

Open position

The total number of futures contracts entered into a particular delivery month or futures market which have not been liquidated by an offsetting futures transaction or by actual physical delivery.

Open position settlement

A document sent once a month to a client showing each contract the client holds as an open position, the margins paid, and the current profit or loss on each. 

Opening price (range)

The price (or price range) recorded during the period when a futures contract commences trading. 

Option

The right, but not the obligation, to take up bought or sold futures position at a predetermined price (the exercise price), for which the buyer pays a premium, limiting his potential loss in the market to the total amount of the premium. See Exchange Traded Option.

Option buyer

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

Options exercised

Open options contracts at, or before, expiry which have been exercised into futures contracts. (SFE options are American style).

Option premium

The price of an option the sum of money that the option buyer pays and the option seller receives for the rights granted by the option. 

Option seller

The person who sells an option in return for a premium and is obligated to perform when the holder exercises his right under the option contract. Also referred to as the writer.

Out-of-the-money

A call option with a striking price higher (or a Put with a striking price lower) than the current market value of the underlying commodity for delivery at the expiration time. 

Overbought

A commodity whose prices have been pushed up to a level that some believe is unrealistically high and cannot be sustained ie. when the speculative long interest has rapidly increased and the speculative short interest is sharply reduced.

Oversold

A commodity whose prices have been pushed down to a level that some believe is unrealistically low and cannot be sustained ie. when the speculative long interest has been drastically diminished and the speculative short interest increases.

Over-the-counter (OTC) market

A market where products such as stocks, foreign currencies, and other cash items are bought and sold by telephone and other means of communication.

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Refers to the standard delivery point or points or to quality of the commodity represented in the contract that is deliverable at contract price.

Physical market

Underlying market on which the derivative (futures or options ) is based.

Pit

An area on the trading floor where futures or options are traded.

Point

The minimum price fluctuation permitted in a commodity traded on the futures exchange, eg. in trade steers, one point = .01c/kg. Not to be confused with an index point in the share price index contract (where one index point = 10 points).

Position

An interest in the market, either long or short, in the form of open contracts which have not been liquidated.

Premium

The excess of one futures contract price over that of another. Also the difference by which one spot commodity sells over another grade of the same or another spot commodity.

Premiums and discounts

The premium or discount allowed the buyer who takes delivery for a grade of a commodity which is higher or lower than the grade specified in the futures contract. 

Put option

An option to take a sold futures position at a predetermined price. See OPTION

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Organisations who disseminate real-time market information. 

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Rally

An upward movement of prices following a decline. 

Range

The difference between the highest and the lowest price at which a given futures contract has traded during a particular period of time, eg. opening period of the market, closing period of the market, day, week, month, life of contract etc.

Reaction

A decline in prices following an advance - the opposite of a  rally.

Realising

Accepting a profit either by a liquidating sale or covering a short sale.

Recovery

An upward movement of the price after decline.

Risk capital

Funds not needed for routine living expenses which are available for purposes of investing or speculating. 

Risk factor

The risk factor (delta) indicates the risk of an option position relative to that of the related futures contract.

Round turn

A completed transaction involving both a purchase and a subsequent sale or a sale followed by a liquidated purchase. 

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To purchase on scale down means to buy at regular price intervals in a declining market. To sell on scale up means to sell at regular price intervals as the market advances.

Sell a contract

Enter into a futures contract to sell a specified commodity. 

Seller's Market

A condition of the market in which there is a scarcity of goods available and hence sellers can obtain better conditions for sale or higher prices. 

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