GLOSSARY
IB: See Introducing Broker.
IMF: International Monetary Fund, established in 1946 to provide international liquidity on a short and medium term and encourage liberalization of exchange rates. The IMF supports countries with balance of payments problems with the provision of loans.
IMM: International Monetary Market part of the Chicago Mercantile Exchange that lists a number of currency and financial futures Implied volatilityA measurement of the market's expected price range of the underlying currency futures based on the traded option premiums.
Illiquidity: Illiquid markets are typified by low levels of trading, with little underlying stock readily available. Buying and selling can cause exaggerated price fluctuations.
Implied Rates: The interest rate determined by calculating the difference between spot and forward rates.
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.
Indicative quote: A market-maker's price which is not firm.
Inflation: Continued rise in the general price level in conjunction with a related drop in purchasing power. Sometimes referred to as an excessive movement in such price levels.
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.
Initial Margin Requirement: The minimum portion of a new security purchase that an investor must pay for in cash.
Initial Performance Bond: See Initial 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.
Instrument(s): See Financial Instruments.
Inter-bank rate: The bid and offer rates at which international banks place deposits with each other. The basis of the Interbank market.
Intercommodity Spread: A spread in which the long and short legs are in two different but generally related commodity or futures markets. Also called an intermarket spread. See Spread.
Interdelivery Spread: A spread involving two different months of the same commodity or futures contract. Also called an intracommodity spread. See Spread.
Interest Arbitrage - The operation wherein foreign debt instruments are purchased to profit from the higher interest rate in the foreign country over the home country. The operation is profitable only when the forward rate on the foreign currency is selling at a discount less than the premium on the interest rate. See Interest Rate Parity.
Interest Rate Futures: Futures contracts traded on fixed income securities such as G.N.M.A.s, U.S. Treasury issues, Eurodollars, 30-day Fed Funds, LIBOR, PIBOR, FIBOR, or CDS. Currency is excluded from this category, even though interest rates are a factor in currency values.
Interest Rate Parity - The formal theory of interest rate parity holds that under normal conditions the forward premium or discount on a currency in terms of another is directly related to the interest differential between the two countries. For example, the forward rate discount (or premium) on Swiss francs in terms of dollars would equal the premium (or discount) of interest rates in Switzerland over (or under) those in the U.S. This theory holds only when there are unrestricted flows of international short-term capital. In reality, numerous economic and legal obstacles restrict the movement, so that actual parity is rare. See Interest Arbitrage.
Interest rate Swaps: An agreement to swap interest rate exposures from floating to fixed or vice versa. There is no swap of the principal. It is the interest cash flows be they payments or receipts that are exchanged.
Intermarket Spread: See Spread and Intercommodity Spread.
Internal Financing: Using the profit from one contract to finance the margin on another.
International Commodities Clearinghouse (ICCH): An independent organization that serves as a clearinghouse for most futures markets in London, Bermuda, Singapore, Australia, and New Zealand.
Internationalization: Referring to a currency that is widely used to denominate trade and credit transactions by non residents of the country of issue. US dollar and Swiss Franc are examples.
Intervention: Action by a central bank to effect the value of its currency by entering the market. Concerted intervention refers to action by a number of central banks to control exchange rates.
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 or futures contract 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. The notable exceptions are interest rate futures, which are inverted when the distant contracts are at a premium to near-month contracts. 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.
Jobber: A trader who trades for small, short-term profits during the course of a trading session, rarely carrying a position overnight.
Job Lot: A form of contract having a smaller unit of trading than is featured in a regular contract.
K: A Nasdaq stock symbol specifying that the stock has no voting rights.
Kerb Trading or Dealing: See Curb Trading.
Kiwi: Slang for the New Zealand dollar.
Lagging Indicators: Market indicators showing the general direction of the economy confirming or denying the trend implied by the leading indicators.
Large Order Execution (LOX) Procedures: Rules in place at the Chicago Mercantile Exchange that authorize a member firm which receives a large order from an initiating party to solicit counterparty interest off the exchange floor prior to open execution of the order in the pit and that provide for special surveillance procedures. The parties determine a maximum quantity and an "intended execution price." Subsequently, the initiating party's order quantity is exposed to the pit; any bids (or offers) up to and including those at the intended execution price are hit (acceptable). The unexecuted balance is then crossed with the contraside trader found using the LOX procedures.
Large Traders: A large trader is one who holds or controls a position in any one futures or in any one option expiration series of a commodity or financial instrument on any one contract market equaling or exceeding the exchange or CFTC-specified reporting level.
Last Notice Day: The final day on which notices of intent to deliver on futures contracts may be issued.
Last Trading Day: Day on which trading ceases for the maturing (current) delivery month.
Law of Demand: Demand exhibits a direct relationship to price. If all other factors remain constant, an increase in demand leads to an increase in price, while a decrease in demand leads to a decrease in price.
Law of Supply: Supply exhibits an inverse relationship to price. If all other factors remain constant, an increase in supply leads to a decrease in price, while a decrease in supply leads to an increase in price.
Leading Indicators: Market indicators that signal the state of the economy for the coming months. Some of the leading indicators include: average manufacturing workweek, initial claims for unemployment insurance, orders for consumer goods and material, percentage of companies reporting slower deliveries, change in manufacturers' unfilled orders for durable goods, plant and equipment orders, new building permits, index of consumer expectations, change in material prices, prices of stocks, change in money supply.
Leaps: Long-dated, exchange-traded options.
Leverage Contract: A contract, standardized as to terms and conditions, for the long-term (ten years or longer) purchase (long leverage contract) or sale (short leverage contract) by a leverage customer of leverage commodity which provides for: (1) participation by the leverage transaction merchant as a principal in each leverage transaction; (2) initial and maintenance margin payments by the leverage customer; (3) periodic payment by the leverage customer or accrual by the leverage transaction merchant to the leverage customer of a variable carrying charge or fee on the initial value of the contract plus any margin deposits made by the leverage customer in connection with a short leverage contract; (4) delivery of a commodity in an amount and form which can be readily purchased and sold in normal commercial or retail channels; (5) delivery of the leverage commodity after satisfaction of the balance due on the contract; and (6) determination of the contract purchase and repurchase, or sale and resale, prices by the leverage transaction merchant.
Leverage Dealer: See Leverage Transaction Merchant.
Leverage Transaction Merchant: Any individual, association, partnership, corporation, or trust that is engaged in the business of offering to enter into, entering into, or confirming the execution of leverage contracts, or soliciting or accepting orders for leverage contracts, and who accepts leverage customer funds or extends credit in lieu of those funds.
Liability: In terms of foreign exchange , the obligation to deliver to a counterparty an amount of currency either in respect of a balance sheet holding at a specified future date or in respect of an un-matured forward or spot transaction.
LIBOR: The London Inter-Bank Offered Rate. Banks use LIBOR when borrowing from another bank.
Licensed Warehouse: A warehouse approved by exchange from which a commodity may be delivered on a futures contract. See Regular Warehouse.
Life of Contact: Period between the beginning of trading in a particular futures contract and the expiration of trading. In some cases this phrase denotes the period already passed in which trading has already occurred. For example, "The life-of-contract high so far is $2.50." Same as Life of Delivery or Life of the Future.
Limit (Up or Down): The maximum price advance or decline from the previous day's settlement price permitted during one trading session, as fixed by the rules of an exchange. See Daily Price Limits.
Limit Move: A price that has advanced or declined the permissible limit during one trading session, as fixed by the rules of a contract market.
Limit Only: The definite price stated by a customer to a broker restricting the execution of an order to buy for not more than, or to sell for not less than, the stated price.
Limit Order: An order in which the customer specifies a price limit or other condition, such as time of an order, as contrasted with a market order which implies that the order should be filled as soon as possible.
Limited Risk Spread: A bull spread in a market where the priced difference between the two contract months covers the full carrying charges. The risk is limited because the probability of the distant month price moving to a premium greater than full carrying charges is minimal.
Liquidation: The closing out of a long position. The term is sometimes used to denote closing out a short position, but this is more often referred to as covering. For an open long, this would be selling the contract. For a short position, it would be buying the contract back (short covering, or covering his short). See Cover.
Liquid Market or Liquidity: A market in which selling and buying can be accomplished with minimal price change. Liquidity refers to a market which allows quick and efficient entry or exit at a price close to the last traded price. This ability to liquidate or establish a position quickly is due to a large number of traders willing to buy and sell. The market is said to flow like liquid, or have liquidity.
Live Data: Data available via the Internet, receiving dish, or computer connected terminal. Some exchanges define live data as data able to be received within five minutes of the time a trading event has occurred on the trading floor. Live data on an electronic exchange is within seconds of a trading event taking place on the electronic exchange.
Local: A member of a U.S. exchange who trades for his own account and/or fills orders for customers and whose activities provide market liquidity. See Floor Trader.
Locked-In: A hedged position that cannot be lifted without offsetting both sides of the hedge (spread). See Hedging. Also refers to being caught in a limit price move.
Lock Limit: The event when prices have risen or fallen by the maximum daily limit, and there is presently no trading in the contract. It may not be possible to execute your order at any price. A market may be lock limit for more than one day, resulting in substantial losses to you when you find it impossible to liquidate losing futures positions.
London Gold Market: Refers to the five dealers who set (fix) the gold price in London: Mocatta & Goldsmid, N. Rothschild & Sons, Johnson Matthey, Sharps Pixley, and Samuel Montagu & Co.
London Option: A generic term sometimes used to describe options on physical commodities or on futures contracts traded abroad (typified by options on London commodity markets). These options, which often had nothing whatsoever to do with legitimate foreign markets, gained notoriety--prior to their ban in the United States in 1978--because of the sales practices and fraud allegations associated with the American dealers who sold them.
Long: (1) One who has bought a futures contract to establish a market position, generally in anticipation of a price increase.; (2) a market position which obligates the holder to take delivery; (3) one who owns an inventory of commodities. See Short.
Long Hedge: Purchase of futures against the fixed price forward sale of a cash commodity.
Long Position: In foreign exchange, when a currency pair is bought, it is understood that the primary currency in the pair is 'long', and the secondary currency is 'short'.
Long the Basis: A person or firm that has bought the spot commodity and hedged with a sale of futures is said to be long the basis. The trader who is long the basis profits from the basis becoming more positive (stronger); for example, if a farmer sold a January soybean futures contract at $6.00 with the cash market at $5.80, the basis is minus .20. If he repurchased the January contract later at $5.50 when the cash price was $5.40, the basis would then be minus .10. The trader would have profited from the hedge by a 10 cent increase in basis.
Lookback Option: An option whose payoff depends on the minimum or maximum price of the underlying asset during some portion of the life of the option.
Lot: A unit of trading. See Even Lot, Job Lot, and Round Lot.
Low: The lowest price of the day for a particular futures contract.
LTM: Leverage Transaction Merchant.
Maintenance Margin: See Margin.
Managed Account: See Controlled Account and Discretionary Account.
Make a market: A dealer is said to make a market when he or she quotes bid and offer prices at which he or she stands ready to buy and sell.
Managed float: When the monetary authorities intervene regularly in the market to stabilize the rates or to aim the exchange rate in a required direction.
Managed Futures: Represents an industry comprised of professional money managers known as commodity trading advisors who manage client assets on a discretionary basis, using global futures markets as an investment medium.
Margin: The amount of money or collateral deposited by a customer with his broker, by a broker with a clearing member, or by a clearing member with the clearinghouse, for the purpose of insuring the broker or clearinghouse against loss on open futures contracts. The margin is not partial payment on a purchase. (1) Initial margin is the total amount of margin per contract required by the broker when a futures position is opened; (2) Maintenance margin is a sum which must be maintained on deposit at all times. If the equity in a customer's account drops to, or under, the level because of adverse price movement, the broker must issue a margin call to restore the customer's equity. See Variation Margin.
Margin Call: (1) A request from a brokerage firm to a customer to bring margin deposits up to initial levels; (2) a request by the clearinghouse to a clearing member to make a deposit of original margin, or a daily or intra-day variation payment, because of adverse price movement, based on positions carried by the clearing member.
Market Close: This refers to the time of day that a market closes. In the 24 hour-a-day foreign exchange market, there is no official market close. 5:00 PM EST is often referred to and understood as the market close because value dates for spot transactions change to the next new value date at that time.
Market Correction: In technical analysis, a small reversal in prices following a significant trending period.
Marketer: See Distributor.
Market-if-Touched (MIT) Order: An order that becomes a market order when a particular price is reached. A sell MIT is placed above the market; a buy MIT is placed below the market. Also referred to as a board order.
Market Marker: A professional securities dealer 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 their 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 commodities industry, this term is sometimes loosely used to refer to a floor trader or local who, in speculating for his own account, provides a market for commercial users of the market. See Specialist System.
Market-on-Close: An order to buy or sell at the end of the trading session at a price within the closing range of prices. See Stop-Close-Only Order.
Market-on-Opening: An order to buy or sell at the beginning of the trading session at a price within the opening range of prices.
Market Order: An order to buy or sell a futures contract at whatever price is obtainable at the time it is entered in the ring or pit. Time, not price is of primary importance. See At-The-Market.
Market Rate: The current quote of a currency pair.
Market Risk: The risks that occur when general market pressures cause the value of an investment to fluctuate.
Market Value Weighted Index: A stock index in which each stock is weighted by market value. A change in the price of any stock will influence the index in proportion to the stock’s respective market value. The value of each stock is determined by multiplying the number of shares outstanding by the stock’s market price per share; therefore, a high-priced stock with a large number of shares outstanding has more impact than a low-priced stock with only a few shares outstanding. The S&P 500 is a value weighted index.
Mark-to-Market: Daily cash flow system used by U.S. futures exchanges to maintain a minimum level of margin equity for a given futures or option contract position by calculating the gain or loss in each contract position resulting from changes in the price of the futures or option contracts at the end of each trading day.
Maturity: Period within which a futures contract can be settled by delivery of the actuals.
Maximum Price Fluctuation: See Limit (Up or Down).
Member Rate: Commission charged for the execution of an order for a person who is a member of the exchange.
Micro economics: The study of economic activity as it applies to individual firms or well defined small groups of individuals or economic sectors.
Mid-price or middle rate: The price half-way between the two prices, or the average of both buying and selling prices offered by the market makers.
Minimum Price Contract: A hybrid commercial forward contract for agricultural products which includes a provision guaranteeing the person making delivery a minimum price for the product. For agricultural commodities, these contracts became much more common with the introduction of exchange-traded options on futures contracts, which permit buyers to hedge the price risks associated with such contracts.
Minimum Price Fluctuation: Smallest increment of price movement possible in trading a given contract.
Momentum: In technical analysis, the relative change in price over a specific time interval. Often equated with speed or velocity and considered in terms of relative strength.
Monetary Base: Currency in circulation plus banks' required and excess deposits at the central bank.
Money Market: Short-term debt instruments.
Money Supply: The amount of money in the economy, consisting primarily
of currency in circulation plus deposits in banks. M1 U.S. money supply
consisting of currency held by the public, traveler's checks, checking
account funds, NOW and super-NOW accounts, automatic transfer service
accounts, and balances in credit unions. M2 U.S. money supply consisting
M1 plus savings and small time deposits (less than $100,000) at
depository institutions, overnight repurchase agreements at commercial
banks, and money market mutual fund accounts. M3 U.S. money supply
consisting of M2 plus large time deposits ($100,000 or more) at
depository institutions, repurchase agreements with maturities longer
than one day at commercial banks, and institutional money market
accounts.
Moving Average Charts: A statistical price analysis method of recognizing different price trends. A moving average is calculated by adding the prices for a predetermined number of days and then dividing by the number of days.
Municipal Bonds - Debt securities issued by state and local governments,
and special districts and counties.
Naked Call: See Naked Option.
Naked Option: The sale of a call or put option without holding an offsetting position in the underlying.
Naked Put: See Naked Option.
National Futures Association (NFA): A self regulatory organization composed of futures commission merchants, commodity pool operators, commodity trading advisors, introducing brokers, leverage transaction merchants, commodity exchanges, commercial firms, and banks, that is responsible--under CFTC oversight--for certain aspects of the regulation of FCMs, CPOs, IBs, LTMs, and their associated persons, focusing primarily on the qualifications and proficiency, financial condition, retail sales practices, and business conduct of these futures professionals.
Nearbys: The nearest delivery months of a commodity futures market.
Nearby Delivery Month: The month of the futures contract closest to maturity.
Negative Carry: The cost of financing a financial instrument (the short-term rate of interest), when the cost is above the current return of the financial instrument. See Carrying Charges and Positive Carry.
Net Position: The difference between the open long contracts and the open short contracts held by a trader in any one commodity or futures contract.
NFA: National Futures Association.
NOB Spread: Note Against Bond. A futures spread trade involving the buying (selling) of a Treasury note futures contract and the selling (buying) of a Treasury bond futures contract.
Non-Client Order: An order on an exchange that is made by a participant firm or on behalf of a partner, officer, director, or employee of the participant firm. Where a participant firm is a firm that is entitled to trade on the exchange, also known as a member firm. While these orders are allowed, priority must be given to client orders for the same securities.
Non-Member Traders: Speculators and hedgers who trade on the exchange through a member but do not hold exchange memberships.
Nominal Price (or Nominal Quotation): Computed price quotation on futures for a period in which no actual trading took place, usually an average of bid and asked prices.
Notice Day: Any day on which notices of intent to deliver on futures contracts may be issued.
Notice of Delivery: A notice that must be presented by the seller of a futures contract to the clearinghouse. The clearinghouse then assigns the notice and subsequent delivery instrument to a buyer. Also Notice of Intention to Deliver.
Notional Amount: The amount (in an interest rate swap, forward rate agreement, or other derivative instrument) or each of the amounts (in a currency swap) to which interest rates are applied (whether or not expressed as a rate or stated on a coupon basis) in order to calculate periodic payment obligations. Also called the notional principal amount, the contract amount, the reference amount, and the currency amount.
Number 1 Top: The highest price paid for a commodity in the last 12-
months.
Number 1 Bottom: The lowest price paid for a commodity in the last 12-
months.
Odd Lot: A non standard amount for a transaction.
Offer: An indication of willingness to sell at a given price; opposite of bid.
Offset or Offsetting: 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. Offsetting eliminates the obligation to make or take delivery. See Cover.
Off-shore: The operations of a financial institution which although physically located in a country, has little connection with that country's financial systems. In certain countries a bank is not permitted to do business in the domestic market but only with other foreign banks. This is known as an off shore banking unit.
Omnibus Account: An account carried by one futures commission merchant with another futures commission merchant in which the transactions of two or more persons are combined and carried in the name of the originating broker rather than designated separately.
One Cancels the Other Order (OCO) :A combination of two orders in which the execution of either one automatically cancels the other.
On Track (or Track Country Station): (1) A type of deferred delivery in which the price is set f.o.b. seller's location, and the buyer agrees to pay freight costs to his destination; (2) commodities loaded in railroad cars on track.
Opening Price (or Range): The price (or price range) recorded during the period designated by the exchange as the official opening.
Opening, The: The period at the beginning of the trading session officially designated by the exchange during which all transactions are considered made "at the opening."
Open Interest: The total number of futures contracts long or short in a delivery month or market that has been entered into and not yet liquidated by an offsetting transaction or fulfilled by delivery. Also called Open Contracts or Open Commitments.
Open Order (or Orders): An order that remains in force until it is canceled or until the futures contracts expire. See Good 'Til Canceled and Good This Week orders.
Open Outcry: Method of public auction required to make bids and offers in the trading pits or rings of commodity trading futures exchanges. This method is supposed to assure the buyer and seller that they will obtain the best price available. It is not similar to the over-the-counter market for securities where a market maker determines the price, nor is it in any way similar to the way art and objects are auctioned off by an auctioneer. In open outcry, traders and brokers in the pit cry out to one another by shouting and hand signals in order to match buy and sell orders.
Open Position: Any position (long or short) that is subject to market fluctuations and has not been closed out by a corresponding opposite transaction.
Option: (1) An option is a unilateral contract which gives the buyer the right to buy or sell a specified quantity of the underlying commodity or financial security at a specific price within a specified period of time, regardless of the market price of that commodity or financial security. Also see Put and Call; (2) A term sometimes erroneously applied to a futures contract. It may refer to a specific delivery month, as the "July Option."
Option Buyer: The person who buys calls, puts, or any combination of calls and puts.
Option Grantor: The person who originates an option contract by promising to perform a certain obligation in return for the price of the option. Also known as Option Writer.
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.
Option Spread: The simultaneous purchase and sale of one or more options contracts, futures, and/or cash positions.
Order: A customer's instructions to buy or sell currencies.
Original Margin: Term applied to the initial deposit of margin money each clearing member firm is required to make according to clearinghouse rules based upon positions carried, determined separately for customer and proprietary positions; similar in concept to the initial margin or security deposit required of customers by exchange regulations. See Initial Margin.
Out-Of-The-Money: A term used to describe an option that has no intrinsic value. For example, a call at $400 on gold trading at $390 is out-of-the-money 10 dollars.
Out Trade: A trade which cannot be cleared by a clearinghouse because the trade data submitted by the two clearing members involved in the trade differs in some respect (e.g., price and/or quantity). In such cases, the two clearing members or brokers 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 brokers involved, the dispute would be settled by an appropriate exchange committee.
Overbought: A technical opinion that the market price has risen too steeply and too fast in relation to underlying fundamental factors. Rank and file traders who were bullish and long have turned bearish.
Overnight Limit: Net long or short position in one or more currencies that a dealer can carry over into the next dealing day. Passing the book to other bank dealing rooms in the next trading time zone reduces the need for dealers to maintain these unmonitored exposures.
Overnight Position: Trader's long or short position in a currency at the end of a trading day.
Overnight Trade: A trade which is not liquidated on the same trading day in which it was established.
Oversold: A technical opinion that the market price has declined too steeply and too fast in relation to underlying fundamental factors. Rank and file traders who were bearish and short have turned bullish.
Over-The-Counter (OTC): Market in which custom-tailored contracts are bought and sold between counterparties and not exchange traded.
Overvalued: Describing an instrument trading at a higher price than it logically should. Normally associated with the results of options price predictions by mathematical models. If an option is trading in the market for a higher price than the model indicates, the option is said to be overvalued.
