Exam 1 Flashcards
forward contract
an agreement to buy or sell at a future date for a given amount of a commodity or an asset at a price agreed on today
futures contract
exchange-traded, standardized, forward-like contract that is marked to market daily
cash market
market for immediate settlement of transactions
futures prices
prices negotiated in futures market for a futures contract
counterparty risk
the risk that your counterparty will default
clearinghouse
separate corporation of a futures exchange response for settling trading accounts & clearing trades
delivery month/maturity
the month in which a futures contract expires
pricing unit
unit of price quoted for a futures contract
pit/floor trading
words and hand signals are used to submit trades
electronic trading
bids and ask prices are submitted electronically
CFTC
independent federal agency that has regulatory jurisdiction over almost all persons or entities involved in futures trading
tick size
minimum increment a given futures contract price can move
price limit
maximum level that the futures price is allowed to change
nearby contract
next contract to expire
distant contract
contract that matures after the nearby contract
hedger
producers, buyers, and users of underlying products
speculator
traders who do not have cash market position and cannot take actual delivery of commodity, but hope to make profit by anticipating price changes
zero-sum game
market as all has no profit
scalper
speculator who exploits the bid-ask spread and earns money by anticipating short-run price changes
long
to buy a futures contract
short
to sell a futures contract
long perspective - if price goes up
price goes up = gain
short perspective - price goes up
price goes up = loss
offset position
to remove yourself from any responsibility
take opposite position
long positions go short and short positions go long
delivery or take delivery
long positions take delivery of product and short positions deliver the underlying product to exchange-certified location
bull market
prices are increasing
cash settlement
traders receive or make payments at contract maturity rather than physical delivery
bear market
prices are falling
mark-to-market
monetary differences for each account are settled by the clearinghouse at the end of each day
initial margin
amount required when futures position is opened
maintenance margin
minimum amount that must be maintained at all times
margin call
call to deposit more funds when equity in margin account falls below maintenance margin
volume
total number of contracts that changed hands during a period of time
open interest
total number of contracts that have been traded and not yet liquidated
market order
buy/sell a certain number of contracts promptly at the current price at the moment
limit order
specifies price for execution of trade
contango
futures prices for distant delivery months are higher than the contracts closer to maturity. aka normal market
backwardation
futures prices for distant delivery months are lower than the contracts closer to maturity. aka inverted market
commodity
good or service for which the demand has no qualitative differentiation across a market
fungibility
little differentiation between a commodity coming from one producer and the same commodity from another
storable commodities
can be stored for an extended period of time without a loss of quality: grains, energy products, softs, and metals
nonstorable commodities
cannot be stored easily or for extended period of time: livestock products
cost of carry
cost of buying the commodity today and carrying it to a certain time in the future
full carry value
cash price today + the cost of carry
arbitrage
purchasing a commodity at one price and selling at a higher price to profit from price discrepancy
market
place or situation that puts sellers & buyers in communication with one another, discovers prices, and facilitates ownership transfer
