Glossary of Terminology in Futures Markets Flashcards
Long position
BUYER of futures contracts
= the number of purhcase contracts held by the buyer
Short position
SELLER of futures contracts
= number of sales contracts held by the seller
Open Interest
number of futures contracts that exist on the book of the Clearinghouse.
One purchase and sale, involving two transacting parties - constitutes an open interest of ONE
Number of purcahse and sale contracts is always equal
Closing Price
Fair value price trading near the end of the trading session, as determined by the exchange
Futures Delivery
the transfer of commodity ownership from the short (the seller) to the long (the buyer)
during the delivery period. Ownership is transferred by the surrender of warehouse receipts or some other
negotiable instrument specified by the contract.
Historical Volatility
measure of price variability showing the variation
or “dispersion” of prices from the mean over a chosen time period. Is calculated using a standard deviation
formula
Implied Volatility
Based on an option pricing model using premiums paid for at-the-money options on futures, that is - the option with a strike price closest to the futures price
Clearinghouse
entity of a futures exchange that acts as a counterparty to every transaction
“clears” every transaction by becoming the buyer to the seller and the seller to the buyer
alwasy holds an equal number of buy and sell contracts
purpose of clearinghouse is to guard against default
Default
the failure of a long or short to deposit sufficient margin with the clearinghouse
ALSO - the failure of a seller to make delivery or the failure of a buyer to take delivery of the commodity during the delivery period
Position limit
max number of buy or sell contracts that a speculator can hold at one time in a futures contract.
Normally, excchanges require position limits to be reduced as the delivery period approaches
Market order
Order type
Order to buy or sell at the market
Limit order
Order type
order to buy at a specific price (or lower) or to sell at a specific price (or higher)
Stop order
Order type
Order to liquidate an existing position
Buy stop is entered against a short position at a price higher than current trading price
Sell stop is entered against a long position at a price lower than current trading price
Stop orders are intended to limit losses
Option
The right to buy or sell a futures contract a particular price
Forward curves
the price structure of the nearby and successive months of a futures contract.
Forward curves may exhibit backwardation, contago or both
