Glossary

Unless otherwise specified, financial terms have been taken from the U.S. Commodity Futures Trading Commission Glossary, and environmental terms have been taken from the United Nations Environment Programme Glossary or the United Nations Framework Convention on Climate Change glossary.*

arbitrage A strategy involving the simultaneous purchase and sale of identical or equivalent commodity futures contracts or other instruments across two or more markets in order to benefit from a discrepancy in their price relationship. In a theoretical efficient market, there is a lack of opportunity for profitable arbitrage.

ask The price level of an offer to sell, as in bid-ask spread.

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 (typically calculated as cash minus futures). Basis is usually computed in relation to the futures contract next to expire and may reflect different time periods, product forms, grades, or locations.

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

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

bid-ask spread The difference between the bid price and the ask or offer price.

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 or associated person, the person who deals with customers in the offices of futures commission merchants; or (3) the futures commission merchant.

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.

cap-and-trade (or emissions trading) A market-based pollution control system in which total emissions of a pollutant are capped at a specified level. Allowances are issued to firms and can be bought and sold on an organized market or over the counter (OTC).

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 futuresoptionsand other derivatives whereby the seller (or short) pays the buyer (or long) the cash value of the underlying commodity or a cash amount based on the level of an index or price according to a procedure specified in the contract. Compare to physical delivery.

Certified Emission Reduction (CER) unit A Kyoto Protocol unit equal to 1 metric tonne of CO2 equivalent. CERs are issued for emission reductions from clean development mechanism (CDM) project activities. Two special types of CERs, called temporary certified emission reductions (tCERs) and long-term certified emission reductions (lCERs), are issued for emission removals from afforestation and reforestation CDM projects.

cheapest to deliver Usually refers to the selection of a class of bonds or notes deliverable against an expiring bond or note futures contract. The bond or note that has the highest implied repo rate is considered cheapest to deliver.

clearing The procedure through which the clearing organization becomes the buyer to each seller of a futures contract or other derivative and the seller to each buyer for clearing members.

commission (1) The charge made by a futures commission merchant for buying and selling futures contracts; or (2) the fee charged by a futures broker for the execution of an order. (Note: When capitalized, the word Commission usually refers to the Commodity Futures Trading Commission.)

commodity (1) A commodity, as defined in the Commodity Exchange Act, includes the agricultural commodities enumerated in Section 1a(4) of the Commodity Exchange Act, 7 USC 1a(4), and all other goods and articles, except onions as provided in Public Law 85-839 (7 USC 13-1), a 1958 law that banned futures trading in onions, and all services, rights, and interests in which contracts for future delivery are at present or in the future dealt in; (2) a physical commodity such as an agricultural product or a natural resource as opposed to a financial instrument such as a currency or interest rate.

contract (1) A term of reference describing a unit of trading for a commodity future or option or other derivative; (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 that have been officially approved by an exchange as deliverable in settlement of a futures contract.

contract market A board of trade or exchange designated by the Commodity Futures Trading Commission to trade futures or options under the Commodity Exchange Act. A contract market can allow both institutional and retail participants and can list for trading futures contracts on any commodity, provided that each contract is not readily susceptible to manipulation. Also called designated contract market.

contract size The actual amount of a commodity represented in a contract.

corner Refers to (1) securing such relative control of a commodity that its price can be manipulated, that is, can be controlled by the creator of the corner; or (2) in the extreme situation, obtaining contracts requiring the delivery of more commodities than are available for delivery.

counterparty The opposite party in a bilateral agreement, contract, or transaction, such as a swap. In the retail foreign exchange (forex) context, the party to which a retail customer sends its funds; lawfully, the party must be one of those listed in Section 2(c)(2)(B)(ii)(I)–(VI) of the Commodity Exchange Act.

counterparty risk The risk associated with the financial stability of the party that one has entered into contract with. Forward contracts impose upon each party the risk that the counterparty will default, but futures contracts executed on a designated contract market are guaranteed against default by the clearing organization.

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

daily price limit The maximum price advance or decline from the previous day's settlement price permitted during one trading session, as fixed by the rules of an exchange. See also price movement limit.

dealer An individual or a firm that acts as a market maker in an instrument such as a security or foreign currency.

deliverable supply The total supply of a commodity that meets the delivery specifications of a futures contract.

delivery The tender and receipt of the actual commodity, the cash value of the commodity, or a delivery instrument covering the commodity (e.g., warehouse receipts or shipping certificates), used to settle a futures 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 or the specified month in which the delivery period begins.

delivery point A location designated by a commodity exchange where stocks of a commodity represented by a futures contract may be delivered in fulfillment of the contract. Also called location.

demutualization When a company transitions from a member-owned ownership structure to a shareholder-owned ownership structure.

depository receipt A document indicating ownership of a commodity stored in a bank or other depository and frequently used as a delivery instrument in precious metal futures contracts.

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 indexes, debt instruments, commodities, or 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 are used to hedge risk or to exchange a floating rate of return for fixed rate of return. They include futures, options, and swaps. For example, futures contracts are derivatives of the physical contract, and options on futures are derivatives of futures contracts.

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 the May futures.

efficient market In economic theory, an efficient market is one in which market prices adjust rapidly to reflect new information. The degree to which the market is efficient depends on the quality of information reflected in market prices. In an efficient market, profitable arbitrage opportunities do not exist, and traders cannot expect to consistently outperform the market unless they have lower-cost access to information that is reflected in market prices or they have access to information before it is reflected in market prices.

emissions The release of greenhouse gases and/or their precursors into the atmosphere over a specified area and period of time.

emissions allowance A legally defined unit that entitles the holder of the allowance to emit a unit of pollution (i.e., one tonne of CO2e). The European Union Allowance is an example. (Global Carbon Glossary, Point Carbon)

emissions trading See cap-and-trade.

exchange A central marketplace with established rules and regulations where buyers and sellers meet to trade futures and options contracts or securities. Exchanges include designated contract markets and derivatives transaction execution facilities.

exchange-traded fund (ETF) An investment vehicle holding a commodity or other asset that issues shares that are traded like a stock on a securities exchange.

exempt commodity The Commodity Exchange Act defines an exempt commodity as any commodity other than an excluded commodity or an agricultural commodity. Examples include energy commodities and metals.

financial commodity Any futures or option contract that is not based on an agricultural commodity, a natural resource such as energy or metals, or any other physical or tangible commodity. It includes currencies, equity securities, fixed income securities, and indexes of various kinds.

financial future A futures contract on a financial commodity.

fixed income security A security whose nominal (or current dollar) yield is fixed or determined with certainty at the time of purchase, typically a debt security.

flexible mechanism Mechanisms defined under the Kyoto Protocol that are intended to lower the overall costs of achieving its emissions targets. These mechanisms enable parties to achieve emission reductions or to remove carbon from the atmosphere cost-effectively in other countries. While the cost of limiting emissions varies considerably from region to region, the benefit for the atmosphere is in principle the same, wherever the action is taken.

floor broker A person with exchange trading privileges who, in any pit, ring, post, or other place provided by an exchange 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 A person with exchange trading privileges who executes his or her own trades by being personally present in the pit or ring for futures trading.

forward contract A cash transaction common in many industries, including commodity merchandising, in which a commercial buyer and seller agree on delivery of a specified quality and quantity of goods at a specified future date. Terms may be more personalized than is the case with standardized futures contracts (i.e., delivery time and amount are as determined between seller and buyer). A price may be agreed on in advance, or there may be agreement that the price will be determined at the time of delivery.

futures commission merchant (FCM) An individual, association, partnership, corporation, ortrust that solicits or accepts orders for the purchase or sale of any commodity for future delivery on or subject to the rules of any exchange and that accepts payment from or extends 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) that obligates each party to the contract to fulfill the contract at the specified price; (3) that is used to assume or shift price risk; and (4) that may be satisfied by delivery or offset.

futures option An option on a futures contract.

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.

global warming Strictly speaking, global warming and global cooling refer to the natural warming and cooling trends that the Earth has experienced all through its history. However, the term usually refers to the gradual rise in the Earth's temperatures that could result from the accumulated gases that are trapped in the atmosphere.

grades Various qualities of a commodity.

greenhouse gases Gaseous constituents of the atmosphere, both natural and artificial, that absorb and reemit infrared radiation and that are thought to be responsible for global warming. The most potent greenhouse gas, carbon dioxide, is rapidly accumulating in the atmosphere due to human activities.

hedge To protect oneself against price volatility of a commodity by taking an equal and opposite position in a related securities market (e.g., forward or futures market).

hedge fund A private investment fund or pool that trades and invests in various assets such as securities, commodities, currency, and derivatives on behalf of its clients, typically wealthy individuals. Some commodity pool operators operate hedge funds.

hedger A trader who enters into positions in a futures market opposite to positions held in the cash market to minimize the risk of financial loss from an adverse price change, or who purchases or sells futures as a temporary substitute for a cash transaction that will occur later. One can hedge either a long cash market position (e.g., one owns the cash commodity) or a short cash market position (e.g., one plans on buying the cash commodity in the future).

initial public offering (IPO) When a private company begins to sell its shares to the public.

instrument A tradable asset such as a commodity, security, or derivative, or an index or value that underlies a derivative or could underlie a derivative.

interest rate futures Futures contracts traded on fixed income securities such as U.S. Treasury issues or based on the levels of specified interest rates such as the London Interbank Offered Rate (LIBOR). Currency is excluded from this category, even though interest rates are a factor in currency values.

liquidation The closing out of a long position. The term is sometimes used to denote closing out a short position, but the latter is more often referred to as covering. See also offset.

liquidity In terms of markets, liquidity is the ability to buy and sell an asset quickly and in large volume without substantially affecting the asset's price. In terms of instruments, liquidity refers to those assets that can be converted into cash quickly without a significant loss in value. (Glossary of Statistical Terms, OECD)

liquid market A market in which selling and buying can be accomplished with minimal effect on price.

long (1) One who has bought a futures contract to establish a market position; (2) a market position that obligates the holder to take delivery; (3) one who owns an inventory of commodities. See also short.

manipulation Any planned operation, transaction, or practice that causes or maintains an artificial price. Specific types include corners and squeezes as well as unusually large purchases or sales of a commodity or security in a short period of time in order to distort prices, and putting out false information in order to distort prices.

margin The amount of money or collateral deposited by a customer with a broker, by a broker with a clearing member, or by a clearing member with a clearing organization. The margin is not partial payment on a purchase. Also called performance bond.

market maker A professional securities dealer or person with trading privileges on an exchange who has an obligation to buy when there is an excess of sell orders and to sell when there is an excess of buy orders. By maintaining an offering price sufficiently higher than the buying price, these firms are compensated for the risk involved in allowing their inventory of securities to act as a buffer against temporary order imbalances. In the futures industry, this term is sometimes loosely used to refer to a floor trader or local who, in speculating for his or her own account, provides a market for commercial users of the market. Occasionally a futures exchange will compensate a person with exchange trading privileges to take on the obligations of a market maker to enhance liquidity in a newly listed or lightly traded futures contract.

mark-to-market Part of the daily cash flow system used by U.S. futures exchanges to maintain a minimum level of margin equity for a given futures or option contract position by calculating the gain or loss in each contract position resulting from changes in the price of the futures or option contracts at the end of each trading session. These amounts are added to or subtracted fromeach account balance.

maturity Period within which a futures contract can be settled by delivery of the actual commodity.

money market The market for short-term debt instruments.

offer An indication of willingness to sell at a given price; the price level of the offer may be referred to as the ask (i.e., the opposite of the bid).

offset Liquidating a purchase of futures contracts through the sale of an equal number of contracts of the same delivery month, or liquidating a short sale of futures through the purchase of an equal number of contracts of the same delivery month.

open interest The total number of futures contracts long or short in a delivery month or market that have been entered into and not yet liquidated by an offsetting transaction or fulfilled by delivery.

open outcry A method of public auction, common to most U.S. commodity exchanges during the twentieth century, where trading occurs on a trading floor and traders may bid and offer simultaneously either for their own accounts or for the accounts of customers. Transactions may take place simultaneously at different places in the trading pit or ring. At most exchanges open outcry has been replaced or largely replaced by electronic trading platforms.

option A contract that gives the buyer the right, but not the obligation, to buy or sell a specified quantity of a commodity or other instrument at a specific price within a specified period of time, regardless of the market price of that instrument. See also put.

out trade A trade that cannot be cleared by a clearing organization because the trade data submitted by the two clearing members or two traders involved in the trade differs in some respect (e.g., price and/or quantity). In such cases, the two clearing members or traders involved must reconcile the discrepancy, if possible, and resubmit the trade for clearing. If an agreement cannot be reached by the two clearing members or traders involved, the dispute would be settled by an appropriate exchange committee.

over-the-counter (OTC) The trading of commodities, contracts, or other instruments not listed on any exchange. OTC transactions can occur electronically or over the telephone.

par (1) Refers to the standard delivery point(s) and/or quality of a commodity that is deliverable on a futures contract at the contract price. Serves as a benchmark on which to base discounts or premiums for varying quality and delivery locations; (2) in bond markets, an index (usually 100) representing the face value of a bond.

physical A contract or derivative that provides for the physical delivery of a commodity rather than cash settlement.

physical commodity A tangible commodity rather than a financial commodity, typically an agricultural commodity, an energy commodity, or a metal. See also financial commodity.

physical delivery A provision in a futures contract or other derivative for delivery of the actual commodity to satisfy the contract. Compare to cash settlement.

pit A specially constructed area on the trading floor of some exchanges where trading in a futures contract or option is conducted. On other exchanges, the term ring designates the trading area for commodity contracts.

position limit The maximum position, either net long or net short, in one commodity future (or option) or in all futures (or options) of one commodity combined that may be held or controlled by one person (other than a person eligible for a hedge exemption) as prescribed by an exchange and/or by the CFTC.

price discovery The process of determining the price level for a commodity based on supply-and-demand conditions. Price discovery may occur in a futures market or cash market.

price movement limit The maximum price advance or decline from the previous day's settlement price permitted during one trading session, as fixed by the rules of an exchange. In some futures contracts, the limit may be expanded or removed during a trading session a specified period of time after the contract is locked limit. See also daily price limit.

primary market A market where new issues of stocks and bonds are sold, and where the proceeds go to the issuer. (Glossary of Statistical Terms, OECD)

put An option contract that gives the holder the right but not the obligation to sell a specified quantity of a particular commodity, security, or other asset or to enter into a short futures position at a given price (the strike price) on or prior to a specified expiration date.

runners Messengers or clerks who deliver orders received by phone clerks to brokers for execution in the pit.

savings and loan associations (S&Ls) Historically, depository institutions that accepted deposits mainly from individuals and invested heavily in residential mortgage loans. Although still primarily residential lenders, S&Ls may now offer checking-type deposits and make a wider range of loans. (Glossary of Economic Terms, Federal Reserve Bank of San Francisco)

scalper A speculator, often with exchange trading privileges, who buys and sells rapidly, with small profits or losses, holding positions for only a short time during a trading session. Typically, a scalper will stand ready to buy at a fraction below the last transaction price and to sell at a fraction above (e.g., to buy at the bid and sell at the offer or ask price), with the intent of capturing the spread between the two, thus creating market liquidity.

seat An instrument granting trading privileges on an exchange. A seat may also represent an ownership interest in the exchange.

secondary market The market where securities are bought and sold once they have been issued in the primary markets. The secondary market gives a continuing opportunity for buying and selling and for price discovery, and provides the liquidity that allows the primary market to function.(Financial Glossary, Reuters)

security Generally, a transferable instrument representing an ownership interest in a corporation (equity security or stock) or the debt of a corporation, municipality, or sovereign. Other forms of debt such as mortgages can be converted into securities. Certain derivatives on securities (e.g., options on equity securities) are also considered securities for the purposes of the securities laws. Security futures products are considered to be both securities and futures products. Futures contracts on broad-based securities indexes are not considered securities.

settlement The act of fulfilling the delivery requirements of the futures contract.

settlement price The daily price at which the clearing organization clears all trades and settles all accounts between clearing members of each contract month. Settlement prices are used to determine both margin calls and invoice prices for deliveries. The term also refers to a price established by the exchange to even up positions that may not be able to be liquidated in regular trading.

shipping certificate A negotiable instrument used by several futures exchanges as the futures delivery instrument for several commodities (e.g., soybean meal, plywood, and white wheat). The shipping certificate is issued by exchange-approved facilities and represents a commitment by the facility to deliver the commodity to the holder of the certificate under the terms specified therein. Unlike an issuer of a warehouse receipt, who has physical product in store, the issuer of a shipping certificate may honor its obligation from current production or through-put as well as from inventories.

short (1) The selling side of an open futures contract; (2) a trader whose net position in the futures market shows an excess of open sales over open purchases. See also long.

short selling Selling a futures contract or other instrument with the idea of delivering on it or offsetting it at a later date.

speculator In commodity futures, a trader who does not hedge, but who trades with the objective of achieving profits through the successful anticipation of price movements.

spot Market of immediate delivery of and payment for the product. See also spot market.

spot commodity (1) The actual commodity as distinguished from a futures contract; (2) sometimes used to refer to cash commodities available for immediate delivery.

spot 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.

tick Refers to a minimum change in price up or down. An uptick means that the last trade was at a higher price than the one preceding it. A downtick means that the last price was lower than the one preceding it.

trader (1) A merchant involved in cash commodities; (2) a professional speculator who trades for his or her own account and who typically holds exchange trading privileges.

trading floor A physical trading facility where traders make bids and offers via open outcry or the specialist system.

transaction The entry or liquidation of a trade.

transaction costs Costs incurred when buying or selling securities. These include brokers' commissions and spreads (the difference between the price the dealer paid for a security and the price at which it can be sold).

Treasury bills (or T-bills) Short-term zero coupon U.S. government obligations, generally issued with various maturities of up to one year.

Treasury bonds (or T-bonds) Long-term (more than 10 years) obligations of the U.S. government that pay interest semiannually until they mature, at which time the principal and the final interest payment are paid to the investor.

Treasury notes Same as Treasury bonds except that Treasury notes are medium-term (more than one year but not more than 10 years).

underlying commodity The cash commodity underlying a futures contract. Also, the commodity or futures contract on which a commodity option is based, and that must be accepted or delivered if the option is exercised.

volatility A statistical measurement (the annualized standard deviation of returns) of the rate of price change of a futures contract, security, or other instrument underlying an option.

volume The number of contracts traded during a specified period of time. Volume is most commonly quoted as the number of contracts traded, but for some physical commodities it may be quoted as the total of physical units, such as bales, bushels, pounds, or dozens of barrels.

warehouse receipt A document certifying possession of a commodity in a licensed warehouse that is recognized for delivery purposes by an exchange.

yield curve A graphic representation of market yield for a fixed income security plotted against the maturity of the security. The yield curve is positive when long-term rates are higher than short-term rates.