Meaning of a few technical terms
used in Futures trade.
Arbitrage: The simultaneous purchase and sale of similar commodities
in different exchanges or in different contracts of
the same commodities in one exchange to take advantage
of a price discrepancy.
Forward Position: The situation in which
a client does not square off his open positions on that
day and carries it to the next day is known as the Carry
Forward Position.Cash commodities: The actual physical
commodities as distinguished from the futures contract
based on the physical commodities.
Settlement: A method of settling future
contracts whereby the seller pays the buyer the cash
value of the commodities traded according to a procedure
specified in the contract.
Clearing: The procedure through which the clearing house or association
becomes the buyer to each seller of a futures contract
and the seller to each buyer, and assumes responsibility
for protecting buyers and sellers from financial loss
by assuring performance on each contract.
House: An agency or separate corporation
of a futures exchange that is responsible for settling
trading accounts, collecting and maintaining margin
monies, regulating delivery, and reporting trade data.
member of an exchange clearinghouse. All trades of a
non-clearing member must be registered and eventually
settled through a clearing member.
Convergence: The tendency for prices of physical commodities
and futures to approach one another, usually during
the delivery month.
Trader: A speculator who will normally
initiate and offset a position within a single trading
Default: The failure to perform on a futures contract as required
by exchange rules, such as a failure to meet a margin
call or to make or take delivery.
Delivery: The tender and receipt of an actual commodities or warehouse
receipt or other negotiable instrument covering such
commodities, in settlement of a futures contract.
Period: The interval between the time
when the warehouse receipt is given to the exchange
by the seller and the time incurred by the buyer in
getting this warehouse receipt is known as delivery
Derivative: A financial instrument, traded on or off the exchange,
the price of which is directly dependent upon the value
of one or more underlying securities, equity indices,
debt instruments, or any agreed upon pricing index or
Hedging: The practice of offsetting the price risk inherent in
any cash market position by taking the opposite position
in the futures market. Hedgers use the market to protect
their businesses from adverse price changes.
Long: One who has bought futures contracts or owns a cash
Mark-to-Market: To debit or credit on a daily basis a margin account
based on the close of that day's trading session.
Interest: The sum of all long or short
futures contracts in one delivery month or one market
that have been entered into and not yet liquidated by
an offsetting transaction or fulfilled by delivery.
Position: A commitment, either long or short, in the market.
process of determining the price level of a commodities
based on supply and demand factors.
Limit: The maximum advance or decline
from the previous day's settlement price permitted for
a futures contract in one trading session.
daily price at which the clearing house settles all
accounts between clearing members for 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 clearing
organization to calculate account values and determine
margins for those positions still held and not yet liquidated.
Short: One who has sold futures contracts or the cash
Speculator: One who tries to profit from buying and selling
future contracts by anticipating future price movements.
Spot: Usually refers to a cash market price for a physical
commodities that is available for immediate delivery.
Squaring: The practice by which the goods sold in the market are
bought back before the term ends to meet the cycle or
the practice that the bought goods are sold before the
term ends to settle the deal is called squaring. Here
price or commodities is not exchanged, but only profit
Tick: The smallest allowable increment of price movement
for a contract. Also referred to as Minimum Price Fluctuation.
Account: To trade in the Futures market
the client has to register himself and open an account
with the broking organization known as trading account.
Lot: Each commodities should be sold
and bought in the Futures market at a specific quantity.
These quantities are called trading lots fixed by the
exchanges. For rubber and pepper it is 1 ton, while
it is 1 quintal for cardamom.
Volatility: A measurement of the change in price over a given time
Receipt: When the commodities sold in
the Futures market is taken to the warehouse, the client
receives a legal document from the warehouse known as
warehouse receipt. This document has a trade value.