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To enable you to easily understand important terms,
frequently used in derivatives trading, we have a few phrases listed below. Click on any
of them to get an explanation:
Anticipatory
Hedge
Arbitrage
Arbitrage
band
Arbitrage
Channel
Arbitrage
risk
Ask price
Back
Contract
Backwardation
Basis
Basic risk
Basic risk
Bear spread
Beta
Bid-ask
bounce
Bid-ask
spread
Bid price
Broker
Bull market
Bull spread
Buy-and-hold
Buying in
Calendar
spread
CAPM
Carrying
costs
Carrying
charges
Cascade
theory
Cascade
theory
Cash market
Cash price
Cash
settlement
CFTC
Cheap
Circuit
breaker
Clearing
house
Clearing
member
Close
Close out
Closing
Price
Commission
Commodity
pool
Commodity
trading adviser
Composite
hedge
Compulsory
Close-Out
Condor
spread
Contagion
Contango
Continuous
compounding
Contract
Contract
month
Contract
multiplier
Contract
specification
Convergence
Corner
Cost of
carry
Cost
of carry price
Counterparty
Counterparty
risk
Covering
Cross hedge
Crossing
Crowd
Crude basis
Cum dividend
Day order
Day trades
Default risk
Deferred
contract
Delivery
Delivery day
Delivery
month
Delivery
price
Derivative
Discrete
compounding
Double
auction market
Dual
capacity
Dual listing
Dynamic
hedge
Efficient
frontier
Eligible
margin
EDSP
Equity swap
Excess
return
Ex-dividend
Execution
risk
Expiration
Expiration
month
Fair value
Fair
value range
Far contract
Fill or
kill order
Financial
engineering
Float
capitalisation
Floor trader
Forced
liquidation
Forward
contract
Forward months
Front month
Front
running
Fundamental
Analysis
Futures
contract
Futures fund
Futures
and options fund
Futures
option
Geared
futures and options fund
Generalised
hedge
Hedge
Hedge
portfolio
Hedge ratio
Hedging
Holding
period
Horizontal
spread
Implementation
risk
Implied
volatility
Index fund
Index option
Index
participation
Infrequent
trading
Initial
Margin
Inside
information
Insider
trading
Intercommodity
spread
Interdelivery
spread
Intermarket
spread
Intermonth
spread
Intracommodity
spread
Intramarket
spread
Invertmarket
spread
Kerb trading
Leg
Leverage
effect
Lifting a
leg
Limit down
Limit move
Limit order
Limit
order book
Limit price
Limit up
Liquidation
Liquidity
Local
Long
Long hedge
Long the
basic
Lot
Macro
hedging
Maintenance
margin
Margin
Margin call
Market
capitalisation
Market
efficiency
Market-if-touched
order
Market
impact
Market maker
Market-on-close
order
Market-on-open
Market order
Market
portfolio
Market risk
Marking
to the market
Matching
Maturity
Micro
hedging
Minimum
price movement
Mispricing
Momentum
trader
Mutual fund
National
futures Association
Naïve
hedge ratio
Near
contract
Net Position
Non
– Synchronicity
Non trading
Normal
backwardation
Normal
market
Novation
Odd lot
Offer price
Offset
Open
interest
Open outcry
Open
positions
Original
margin
Out trade
Overbought
Overnight
Trade
Overpriced
Oversold
Over-the-counter(OTC)
market
Perfect
hedge
Physical
delivery
Pit
Point
Portfolio
insurance
Position
Position
limit
Position
trading
Positive
feedback tader
Price
discovery
Price limit
Price range
Price
relative
Programme
trading
Punching
and settlement price
Pyramiding
Quasi-futures
contract
Queue
Random walk
Realised
bid-ask price
Reportable
position
Reserve
cash and carry
Rich
Ring
Risk premium
Roll over
Round lot
Round trip
Round turn
Rule 80a
in U.S.
Scalp
Scanning
range
SEBI Securities and Exchange
Board of India
SEC
Security
market line
Settlement
Settlement
date
Settlement
price
Sharpe’s
measure
Short
Short hedge
Short sale
Short the
basis
Simple basis
Size effect
SPAN
Specialist
Speculation
Spiders
Spot market
Spot month
Spot price
Spread
Spread basis
Spread
margin
Spread ratio
Stack hedge
Stale prices
Stop order
Straddle
Strengthening
of the basis
Strike price
Strip hedge
Switch
Synthetic
futures
Systematic
Risk
Tail risk
Tailing
factor
Tailing
the hedge
Tax
timing option
Technical
analysis
Term
structure of futures prices
Theoretical
value
Thin market
TIMS
Tick size
Tick price
Time spread
Tracking
error
Trading lag
Trading
limit
Triple
witching hour
Underlying
assets
Underpriced
Unsystematic
risk
Unwind
Uptick
VaR
Value basis
Value trader
Variation
margin
Volatility
Volume
Weakening
of the basis
Zero-sum
game
90/10 fund
Anticipatory Hedge
A trader expects to make a spot transaction
at a future date and opens a futures position now to protect against a change in the spot
price.
Top
Arbitrage
The simultaneous purchase of one asset
against the sale of the same or equivalent asset in two different markets to create a
riskless profit due to price discrepancies.
Top
Arbitrage band
The band around the no-arbitrage price
within which arbitrage transactions are not worthwhile.
Top
Arbitrage Channel
See arbitrage band.
Top
Arbitrage risk
While the arbitrage transaction is riskless
in theory, in practice, some risks may be present.
Top
Ask
price
The price at which the market maker is
willing to sell. Also called the offer price.
Top
Back Contract
See deferred contract.
Top
Backwardation
This occurs when the spot price exceeds the
current price of a futures contract. The opposite of contango.
Top
Basis
The difference between the cash price of a
financial instrument and the price of a particular futures contract relating to that
instrument. Also known as a crude basis or simple basis.
Top
Basic
risk
The possibility that the value of the basis
will change over time.
Top
Basic
risk
A market in which prices are falling.
Top
Bear
spread
A calendar spread designed to profit in a
bear market.
Top
Beta
A measure of responsiveness of a security
or portfolio to movements in the stock market as a whole. Measures systematic risk.
Top
Bid-ask bounce
In the absence of new information, the
transaction prices for a security will fluctuate between the bid and the ask price,
depending on whether the trade was initiated by a buyer or a seller.
Top
Bid-ask spread
The difference between the ask price and
bid price.
Top
Bid
price
The price at which a market maker is
willing to buy.
Top
Broker
A person who acts as an agent for others in
buying and selling futures contracts in return for a commission.
Top
Bull
market
A market in which prices are rising.
Top
Bull
spread
A calendar spread designed to profit from a
bull market.
Top
Buy-and-hold
A passive strategy in which a trader buys a
security (or portfolio), which is then held for a period of time without revision.
Top
Buying
in
See liquidation.
Top
Calendar spread
The simultaneous purchase and sale of
futures contracts for different delivery months of the same financial instrument. Also
called an intracommodity spread, a horizontal spread or a time spread.
Top
CAPM
Capital Assets Pricing Model. The
equilibrium expected return on an asset depends on the riskless interest rate, the
expected return on the market and the asset’s beta (B) value.
Top
Carrying costs
See carrying charges.
Top
Carrying charges
The total cost of carrying an asset
forwards in time, including storage, insurance and financing costs.
Top
Cascade theory
The stock market crash of October 1987 was
caused by a fall in stock market price, which led portfolio insurers to sell index
futures, resulting in a drop in their price, and, via index arbitrage, a further fall in
stock market prices, etc.
Top
Cascade theory
An arbitrage transaction where the trader
holds a long position in the underlying asset and a short position in the corresponding
futures contract.
Top
Cash
market
In commodities markets this term is used to
refer to the market in a particular grade and location of the underlying asset. For index
futures there is only one underlying grade and location, and so the cash market is
synonymous with the spot market.
Top
Cash
price
See spot price.
Top
Cash settlement
At delivery time, instead of the physical
transfer of the underlying asset, there is a final marking to the market at the EDSP and
the positions are closed out.
Top
CFTC
Commodity Futures Trading Commission. An
independent US federal agency which has regulated futures trading in the United States
since 21st April 1975.
Top
Cheap
See Underpriced.
Top
Circuit breaker
A trading halt when the price movement
exceeds some present limit.
Top
Clearing house
An organisation connected with futures
exchange through which all contracts are reconciled, settled, guaranteed and later either
offset or fulfilled through delivery or cash settlement. Its function is to manage the
margin and delivery systems, as well as to guarantee performance of exchange traded
contracts.
Top
Clearing member
A member of the clearing house.
Top
Close
The time period at the end of the trading
session during which that day’s settlement price is determined.
Top
Close
out
See liquidation.
Top
Closing Price
The last price of the trading period for a
security.
Top
Commission
A fee charged by a broker to a customer
when a position is liquidated. See round trip.
Top
Commodity pool
See future fund.
Top
Commodity pool operator
The firm managing a commodity pool. This
terminology is common in the U.S.
Top
Commodity trading adviser
Professional traders who conduct
individually managed accounts on behalf of investors. This terminology is common in the
U.S.
Top
Composite hedge
A single spot position is hedged using a
number of different futures.
Top
Compulsory Close-Out
A customer’s open positions in futures
contracts are sqaured-up by the member firm holding the account or the Clearing House,
usually after the customer fails to meet margin calls. Also see Forced liquidation.
Top
Condor spread
A bull (bear) calendar spread in two
different maturities is matched by a bear (bull) calendar spread in another two
maturities. This requires there to be at least four outstanding maturities.
Top
Contagion
Mistakes in setting prices in one market
are transmitted to another.
Top
Contango
This exists when the spot price is less
than the current price of a futures contract. The opposite of backwardation.
Top
Continuous compounding
Interest is accurued continuously rather
than at discrete intervals. The interest is assumed to be added to the capital sum and so
interest is then also payable on the interest received.
Top
Contract
The standard unit of trading for futures
markets.
Top
Contract month
See delivery month.
Top
Contract multiplier
The monetary value that is multiplied by
the index value to determine the market value of the futures contract.
Top
Contract specification
The standard terms of the futures contract
to be traded.e g. size of the contract, tick size, settlement and margining methodology,
trading times, delivery procedures.
Top
Convergence
The movement to equality of the spot and
futures prices as the delivery date approaches.
Top
Corner
A few people gain control of all available
supplies of the underlying asset.
Top
Cost of carry
The cost of holding a stock of the
underlying e g the costs of storing, insuring and financing the asset.
Top
Cost of carry price
The futures prices given by the cost of
carrying an equivalent spot position until delivery.
Top
Counterparty
The other party (buyer or seller ) to a
transaction.
Top
Counterparty risk
The risk the counterparty will not fulfil
the terms of the contract. Also called default risk.
Top
Covering
See liquidation.
Top
Cross
hedge
Hedging a risk is one asset by initiating a
position in a different but related asset.
Top
Crossing
A situation where the broker acts for both
the buyer and seller. All cross trades must be transacted on the trading floor, or through
the screen market. This is currently not allowed by SEBI in India.
Top
Crowd
The group of people standing in the futures
pit.
Top
Crude
basis
See basis.
Top
Cum
dividend
A share is cum dividend when the purchaser
receives the next dividend payment.
Top
Day
order
An order to trade futures contracts that
automatically expires at the end of that day’s trading session.
Top
Day
trades
Trades that are opened and closed on the
same day.
Top
Default
risk
The risk that the counterparty will fail to
meet their obligations under a contract.
Top
Deferred contract
Futures contracts other than the near
contract.
Top
Delivery
The transfer of ownership of an actual
financial instrument, or final cash payment inlieu thereof, in settlement of a futures
contract under the specific terms and procedures established by the exchange. Also see
settlement.
Top
Delivery
day
The day on which the futures contract
matures. Also known as expiry day.
Top
Delivery month
The calendar month on which the futures
contract matures, resulting in delivery or cash settlement of the specified financial
instrument. Also known as expiration month.
Top
Delivery price
The price fixed by the clearing house at
which deliveries on futures contracts are invoiced. Also known as the expiry price or the
settlement price.
Top
Derivative
A financial instrument designed to
replicate an underlying security for the purpose of transferring risk.
Top
Discrete compounding
Interest payments are made periodically.
The interest is assumed to be added to the capital sum and so interest is then payable on
the interest received.
Top
Double auction market
This occurs when the price is determined by
competitive bidding between both buyer and sellers, as in futures markets.
Top
Dual capacity
A floor trader is allowed to trade on his
or her own behalf, as well as an agent for others.
Top
Dual
listing
Futures contracts on the same underlying
asset are traded on more than one exchange.
Top
Dynamic hedge
An investment strategy in which a long
position in shares is hedged by selling futures. The futures position is adjusted
frequently so that it replicates a purchased put option.
Top
Efficient frontier
Feasible combinations of expected profit
and risk which, for each level of risk, have maximum profit.
Top
Eligible margin
The cash or other collateral which may be
accepted as cover for margin obligations.
Top
EDSP
Exchange Delivery Settlement Price. This is
the price at which the delivery or cash settlement takes place, expressed in index points.
This terminology is common in the U.S.
Top
Equity
swap
A contract between two parties by which
they swap the returns from an equity portfolio and an investment at a fixed or variable
interest rate.
Top
Excess return
The return on a security beyond that which
could have been earned on riskless asset.
Top
Ex-dividend
A share is ex-dividend when the purchaser
does not receive the next dividend payment.
Top
Execution risk
The risk that prices may move between the
time an order is initiated and executed.
Top
Expiration
The date that any futures contract (or
option) ceases to exist.
Top
Expiration month
See delivery month.
Top
Fair
value
The no-arbitrage price of a futures
contract. Also known as theoretical value.
Top
Fair value range
See arbitrage band.
Top
Far
contract
The future that is furthest from its
delivery month i. e. has the longest maturity.
Top
Fill or kill order
An order to trade futures contracts which
must be executed immediately. If not it is cancelled.
Top
Financial engineering
The process of designing new financial
instruments, especially derivative securities.
Top
Float capitalisation
The value of that portion of the
firm’s equity that is available for trading, and so excludes shares in the hands of
controlling investors.
Top
Floor
trader
A person on the floor of an exchange who
executes orders in the open outcry system.
Top
Forced liquidation
A customer’s open positions in futures
contracts are offset by the brokerage firm holding the account, usually after the customer
fails to meet margin calls. Also called compulsory close-out.
Top
Forward contract
An agreement between two parties to trade
an asset at a specified future date and price. This is an OTC product.
Top
Forward months
Futures contracts other than the near
contract.
Top
Front
month
See near contract.
Top
Front running
Brokers trade on their own behalf, ahead of
their customers order’s. This was only banned in Japan in December 1992.
Top
Fundamental Analysis
The application of economic analysis to
publicly available information to predict price movements.
Top
Futures contract
A legal, transferable standardised contract
that represents an agreement to buy or sell a quantity of a standardised asset at a
predetermined delivery date. This is an exchange traded product.
Top
Futures
fund
They raise money from investors and pool
this capital into a fund which is invested in futures contracts. A popular form is a 90/10
fund.
Top
Futures and options fund
U K unit trusts that can invest up to 10
percent of their funds in futures and options.
Top
Futures option
An option written on a futures contract.
Top
Geared futures and options fund
U K unit trusts that can invest up to 20
percent of their funds in futures and options and have the potential to lose all the money
in the fund.
Top
Generalised hedge
A number of different spot positions are
hedged using a variety of different futures.
Top
Hedge
A spread between a spot asset and a futures
position that reduces risk.
Top
Hedge portfolio
The portfolio of shares whose risk is being
hedged away.
Top
Hedge
ratio
The number of futures contracts bought or
sold divided by the number of spot contracts whose risk is being hedged.
Top
Hedging
The purchase or sale of
futures contracts to offset possible changes in the value of assets or cost of liabilities
currently held, or expected to be held at some future date.
Top
Holding period
The time period over which
an investment is held.
Top
Horizontal spread
See calendar spread.
Top
Implementation risk
The risk that new
information may arrive after an investors has decided to trade and before the order is
submitted.
Top
Implied volatility
The variance of returns on
an asset that is implied by equating the observed and theoretical prices of an option on
that asset.
Top
Index fund
An institutional investment
portfolio that aims to replicate the performance of a chosen market index.
Top
Index option
An option written on a
stock index.
Top
Index participation
The trading of baskets of
shares corresponding to those in some specified market index. The buyer of the index
participation pays immediately in exchange for a promise by the seller to deliver the
shares (or their cash equivalent) at one of a number of subsequent dates, chosen by the
buyer. Also know as an Exchange Traded Fund (ETF).
Top
Infrequent trading
If trading is not
continuous it is infrequent, infrequent trading may be either non-synchronous trading or
non-trading.
Top
Initial Margin
The ‘good faith’
deposit of the cash or securities which a user of futures market must make with his or her
broker when purchasing or selling futures contracts, as a guarantee of contract
fulfilment.
Top
Inside information
Private and confidential information,
usually acquired through a position of trust, that is likely to have an impact on security
prices when made public.
Top
Insider trading
Dealing on the basis of inside information.
Top
Intercommodity spread
The simultaneous purchase and sale of
futures contracts in different financial instruments.
Top
Interdelivery spread
See calendar spread.
Top
Intermarket spread
A spread involving futures contracts traded
on different exchanges.
Top
Intermonth spread
See calendar spread.
Top
Intracommodity spread
See calendar spread.
Top
Intramarket spread
A spread involving future contracts traded
on the same exchange.
Top
Invertmarket spread
A market in which the price of a stock
index futures is higher the closer is the contract to delivery.
Top
Kerb
trading
Unofficial trading when the market has
closed.
Top
Leg
One of the two positions constituting a
spread.
Top
Leverage effect
When the price of a share rises and the
value of the firm’s outstanding debt is fixed, the ratio of debt to equity falls,
i.e. its leverage (or gearing) falls. This makes return on the share less risky. A reverse
argument applies for price falls.
Top
Lifting a leg
Liquidating one side of a spread or
arbitrage position prior to liquidating the other side. Also called ‘legging
out’.
Top
Limit
down
This occurs when the futures price has
moved down to the lower price limit.
Top
Limit
move
The price has increased or decreased by the
maximum amount permitted by the price limits.
Top
Limit
order
An order to buy or sell at a specific price
(or better), to be executed when and if the market price reaches the specified price.
Top
Limit order book
A list of the outstanding limit orders.
Top
Limit
price
See price limit.
Top
Limit
up
This occurs when the price has moved up to
the upper price limit.
Top
Liquidation
Any transaction that offsets or closes out
a previously established long or short position; also known as buying in or covering.
Top
Liquidity
The degree to which a market can
accommodate a large volume of business without moving the price, i.e. market impact.
Top
Local
A floor trader who executes trades on his
or her own account in the open outcry system.
Top
Long
A market position established by buying one
or more futures contracts not yet close out through an offsetting sale; the opposite of
shot.
Top
Long
hedge
A hedge involving a long futures position
and a short spot position.
Top
Long the basic
The purchase of the underlying asset and
sale of contracts in the corresponding futures contract.
Top
Lot
See contract.
Top
Macro hedging
A firm hedges the combined exposure of all
its assets and liabilities. See also micro hedging.
Top
Maintenance margin
The minimum amount which a person is
required to keep in their margin account.
Top
Margin
A deposit of funds to provide collateral
for an investment position. See also initial margin, variation margin and maintenance
margin.
Top
Margin
call
A request for the payment of additional
funds into a person’s margin account.
Top
Market capitalisation
This is calculated by multiplying the
number of a company’s shares issued by the share price.
Top
Market efficiency
The degree to which current prices reflect
a set of information.
Top
Market-if-touched order
An order to buy futures contracts which
becomes a market order if the market reaches a specified price below the current price, or
to sell if the market price reaches a specific level above the current price. Opposite of
a stop order.
Top
Market impact
See liquidity.
Top
Market
maker
A dealer who makes firm bids and offers at
which he or she will trade.
Top
Market-on-close order
An order to buy or sell at a price as close
as possible to the closing price for that day.
Top
Market-on-open
A market order to be executed during the
opening.
Top
Market
order
An order to buy or sell for immediate
execution at the best obtainable price.
Top
Market portfolio
A market value weighted portfolio
consisting of every share traded on the exchange.
Top
Market
risk
The possibility of gain or loss due to
movements in the general level of the stock market. Also see systemic risk.
Top
Marking to the market
The daily revaluation of open positions to
reflect profits and losses based on closing market prices at the end of the trading day.
Top
Matching
The process by which buy and sell
transactions are reconciled, before being passed to the clearing house.
Top
Maturity
The length of time before delivery.
Top
Micro hedging
A firm hedges only specific transactions
rather than all its assets and liabilities. See also macro hedging.
Top
Minimum price movement
The smallest possible price change. See
also point and tick size.
Top
Mispricing
It usually refers to the actual less the
no-arbitrage futures price, and may be deflated by either the spot price or the
no-arbitrage futures price. In a few cases the mispricing incorporates transactions costs.
Top
Momentum trader
A trader who sells when the market falls
and buys when the market rises. This behaviour tends to amplify price movements. Also
known as a positive feedback trader.
Top
Mutual
fund
This is a type investment company that
sells its shares (called units) to the public and uses the proceeds to invest in other
companies.
Top
National futures Association
A self-regulating US body which registers
and regulates those employed in the futures brokerage industry.
Top
Naïve hedge ratio
A one-for-one hedge ratio.
Top
Near contract
The future that is nearest to its delivery
month i.e. has the shortest maturity.
Top
Net Position
The difference between the long and short
open positions in any one future held by an individual or group.
Top
Non – Synchronicity
The stock trades at least once every
interval, but not necessarily at the close of each interval. See non-trading.
Top
Non
trading
The stock does not trade during every
interval. See non-synchronicity.
Top
Normal backwardation
This occurs when the expected price of a
futures contract at delivery exceeds the current price of the future.
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Normal market
A market in which the price of a stock
index futures contract is lower the closer is the contract to delivery.
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Novation
The legal word for the conversion of a
futures contract between a buyer and seller into two separate contracts, each with the
clearing house as counterparty.
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Odd
lot
A quantity of shares that does not
correspond to that in which trading normally takes place.
Top
Offer
price
See ask price.
Top
Offset
See liquidation.
Top
Open interest
The cumulative number of either long or
short contracts which have been initiated on an exchange, and have not been offset.
Top
Open
outcry
The method trading on many futures
exchanges whereby bids and offers are audible to all other participants on the floor of
the exchange (or pit) in a competitive public action.
Top
Open positions
Contracts which have been initiated and are
not yet offset by a subsequent sale of purchase, or by making or taking delivery.
Top
Original margin
The initial margin required to cover a new
futures position.
Top
Out
trade
A trade for which there is not a matching
record by the two parties. This may be because the price, quantity, maturity, counter
party or side (long – short) fail to match.
Top
Overbought
A view that the market price has risen too
strictly in relation to the underline fundamental factors.
Top
Overnight Trade
A trade which is not liquidated on the same
day in which it was established.
Top
Overpriced
The actual futures price exceeds the
no-arbitrage futures price.
Top
Oversold
A view that the market price has declined
too steeply in relation to the underlying fundamental factors.
Top
Over-the-counter(OTC) market
A market where dealing does not take place
at an organised exchange.
Top
Perfect hedge
A hedge where the change in the value of
the future contracts is identical to the change in the value of the other asset or
liability.
Top
Physical delivery
Settlement of a futures contract by the
supply or receipt of the asset underlying the contract.
Top
Pit
An octagonal or hexagonal area on the
trading floor of an exchange, surrounded by a tier of steps upon which traders and brokers
stand while executing futures trades in the open outcry system.
Top
Point
This can mean the minimum permissable price
change, or it can mean a price change of 100 basis points. For index point are simply the
units of measurement of the index. Currently for the FT-SE 100 the minimum price movements
is 0.5 index points.
Top
Portfolio insurance
An investment strategy employing various
combinations of shares, options, futures and debt that is designed to provide a minimum or
floor value to the portfolio.
Top
Position
A market commitment. Also see net position.
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Position limit
A restriction on the maximum number of
contracts that can be held by a single trader at any one time.
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Position trading
A trading strategy in which a position is
held for longer than one day.
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Positive feedback tader
See momentum trader.
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Price discover
The process by which a market (usually the
futures market) reflects new information before another related market (usually the spot
mrket).
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Price
limit
The maximum and minimum prices, as
specified by the exchange, between which transactions may take place during a single
trading session.
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Price
range
The difference between the highest and
lowest pricing during a given period.
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Price relative
The price at time t + l divided by the
price at time t.
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Programme trading
The simultaneous trading of a basket of
shares as part of a plane or strategy. The NYSE definition require the simultaneous
trading of at least fifteen stocks with a total value of over $1 million.
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Punching and settlement price
A manipulator first establishes a long
(short) position in index futures, and then buys (sells) shares to push the final
settlement price up (down).
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Pyramiding
The use of profits on a previously
established position as margin for adding to that position.
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Quasi-futures contract
This is the same as a futures contract,
except that the payments of variation margin do not involve the full daily price change.
Instead, the traders pays(or receives) each day the present value of the daily price
change if it were paid on delivery day; a smaller sum.
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Queue
The sequence of potential arbitrageurs, in
order of increasing transactions costs.
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Random
walk
The theory that changes in the variable
(for example, share returns) are at random; that is, they are independently and
identically distributed over time.
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Realised bid-ask price
The difference between the prices at which
scalpers have bought and sold.
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Reportable position
The number of futures contracts above which
one must report daily to the exchange or the CFTC the size of the position by delivery
month and purpose of trading.
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Reserve cash and carry
An arbitrage transaction where the trader
holds a short position in the underlying asset and a long position in the corresponding
futures contract.
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Rich
See overpriced.
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Ring
See pit.
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Risk
premium
The additional return risk-averse investors
require for assuming risk.
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Roll
over
Liquidation for a futures position, and the
establishment of a similar position in a more distant delivery month. This is also called
a switch. When a hedger switches their futures position to a more distant delivery month
this can be called ‘rolling the hedge forwards’.
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Round
lot
A quantity of shares that corresponds to
that in which trading normally takes place.
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Round
trip
The purchase (sale) of a futures contract
and the subsequent offsetting sale (purchase). Transactions costs are normally quted on a
‘round trip’ basis.
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Round
turn
See round trip.
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Rule 80a in U.S.
When the NYSE moves down (up) by more than
some preset limit, selling (buying) shares (not just short selling) as part of an index
arbitrage transaction can be execute only if the last price movement was up (down). This
rule was introduced in 1990.
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Scalp
To trade for small gains, normally by
establishing and liquidating a futures position quickly, often within minutes, but always
within the same day.
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Scanning range
The largest price movement in the
underlying security for which the clearing house requires cover.
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SEBI Securities and Exchange Board
of India
The regulatory body for all
participants in the securities and derivatives markets in India.
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SEC
Securities and Exchange Commission. A
federal agency charged with the regulation of all US equity and options markets.
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Security market line
A line showing the relationship between a
security’s beta and its expected return.
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Settlement
The process by which clearing members close
positions.
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Settlement date
See delivery date.
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Settlement price
The price which the clearing house uses to
determine the daily variation margin payments. It may differ from the price of the last
transaction.
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Sharpe’s measure
A measure of the risk adjusted performance
of an investment. It is calculated as the excess return on the investment divided by the
standard deviation of investment returns.
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Short
A market position established by selling
one or more futures contracts not yet closed out through an offsetting purchase in
anticipation of falling prices; the opposite of long.
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Short
hedge
A hedge involving a short futures position
and a long spot position.
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Short
sale
A trader sells shares he or she does not
own This is equivalent to a negative holding of the share.
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Short the basis
The purchase of a futures contract as a
hedge against a commitment to sell the underlying asset.
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Simple
basis
See basis.
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Size
effect
This exists when the return of small firms
exceed the risk adjusted returns predicted by the CAPM.
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SPAN
Standard Portfolio Analysis of Risk. This
is a system for calculating initial margins on portfolios of options and futures developed
by the CME, and used by them since 16 December 1988, and by LIFFE from 2 April 1991.
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Specialist
A floor trader charged with the making of a
fair and orderly market in particular shares or options.
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Speculation
Trading on anticipated price changes, where
the trader does not hold another position which will offset any such price movements.
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Spiders
An example of an ETF, Standard and
Poor’s Depositary Receipts (SPDRs) were introduced on 29 January 1993 by AMEX. They
represent shares in a trust consisting of a basket of shares that is designed to track the
S&P500 index. The trust has a life of 25 years, at which point it will be distributed
to share holders.
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Spot
market
The market in which the asset underlying
the futures contract is traded e.g. the stock market.
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Spot
month
See delivery month.
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Spot
price
A derivation of ‘on the spot’
usually referring to the cash market price of a financial instrument available for
immediate delivery.
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Spread
The simultaneous purchase of one futures
contract and sale of another, in the expectation that the price relationship between the
two will change so that the subsequent offsetting sale and purchase will yield a net
profit.
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Spread
basis
The difference in the prices of the near
and far contracts in a spread.
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Spread margin
A reduced margin payment for the holder of
a spread position.
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Spread
ratio
The number of futures contracts bought,
divided by the number of futures contracts sold.
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Stack
hedge
A large position in an existing futures
contract is partly rolled over into a later contract month, possibly several times. This
procedure may be used to hedge a series of payments or receipts.
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Stale
prices
A price is stale if it refers to the price
of a trade that took place some time ago. See infrequent trading.
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Stop
order
A market order to buy when the market price
has touched a specified level above the current price, or a market order to sell when the
market price has touched a specified level below the current price. Also known as a
stop-loss order. Opposite of a market-if-touched order.
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Straddle
For futures contracts, this is a synonym
for a spread.
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Strengthening of the basis
This occurs when the futures price declines
relative to the spot price.
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Strike
price
See exercise price.
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Strip
hedge
A trader takes the same position (long or
short) in a future for a series of delivery dares. This may be used to hedge a series of
payments or receipts.
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Switch
See roll over.
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Synthetic futures
A combination of a long call option and a
short put option, or debt and the underlying asset, that replicates the behaviour of a
long futures contract.
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Systematic Risk
Risk inherent in the market as a whole
which cannot be diversified away. It is measured for each firm by a ‘beta’
value. Also known as market risk.
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Tail
risk
The risk created by marking to the market.
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Tailing factor
The correction factor by which the hedge
ratio is multiplied to allow for tail risk.
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Tailing the hedge
Correcting the size of hedge to allow for
the risks of marking to the market.
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Tax timing option
Capital gain (losses) on shares are taxable
when realised. The tax timing option refers to the fact that the owner can choose when to
liquidate his or her position in the shares, and hence when the tax liability (or loss)
occurs.
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Technical analysis
The prediction of prices by examining past
prices, volume and open interest .
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Term structure of futures prices
The relationship between futures prices on
the same underlying asset, but with a different time to maturity.
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Theoretical value
See fair value.
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Thin
market
A market with few trades.
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TIMS
Theoritical Intermarket Margining System.
This another system for calculating performance bond (initial margin) requirements for
options. It is developed by the Options Clearing Corporation OCC).
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Tick
size
Minimum permitted movement in the
quotation. Measured in index points.
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Tick
price
See minimum price movement.
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Time
spread
See calendar spread.
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Tracking error
The deviations between a portfolio’s
performance and that of the portfolio whose performance it is desired to mimic.
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Trading
lag
The time delay between when an order is
initiated and executed.
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Trading limit
The maximum number of contracts that a
person can trade in a single day.
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Triple witching hour
That time every 3 months when four
different contracts reach maturity – stock index futures contracts, stock index
options on index futures and some options on index futures and some options on individual
stocks.
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Underlying assets
The security, stock, commodity or index on
which a futures contract is based.
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Underpriced
The actual futures price is less than the
no-arbitrage futures price.
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Unsystematic risk
Risk due to event which affect individual
companies, not the market as whole. It can be removed by holding a well diversified
portfolio.
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Unwind
See liquidation.
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Uptick
An increase of one tick in the price of a
security.
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VaR
Value at Risk. A risk management
methodology, which attempts to measure the maximum loss possible on a particular position,
with a specified level of certainty or confidence.
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Value
basis
The actual futures price less the
no-arbitrage futures price.
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Value
trader
A trader who buys when assets look
underpriced, and sells when assets look overpriced. Such a trader tends to buy when there
is a large drop in prices, and sell when there is a large rise, and so tends to stabilise
prices.
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Variation margin
The gain or losses on open contracts, which
are calculated by reference to the settlement price at the end of each trading day and are
credited or debited by the clearing house to the clearing member’s margin accounts
and by those members to or from the appropriate customers margin accounts.
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Volatility
A market is volatile when it is prices
fluctuate a lot. Academics often choose to measure the volatility of a variable by its
variance.
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Volume
The number of transactions in a futures
contract during a specified period of time.
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Weakening of the basis
This occurs when the futures price rises
relative to the spot price.est of the week.
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Zero-sum game
This is when the gains (losses) of the long
positions are exactly equal to the losses (gains) of the short positions. This is true for
the market as a whole for all futures products.
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90/10
fund
A sum is invested in fixed interest
securities to guarantee the initial investment at a specified date (e.g. 90 percent of the
money), and the remainder (e.g. 10 percent) is used to trade futures.
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