Commodities Vocab

1
More on Options, Hedging, Spreading and
Speculating in the Futures and Commodities
Markets.A Review

• Stocks and Commodities
• 2002-2003

2
Gumps Concept Map
CFTC
(Actually use the commodities)
Commodities
Regulates
Hedgers
Exchanges
(Floor Broker)
Futures Contract
(A contract to deliver commodities at a later
date.)
Call
Put
Speculators
Options
(Assume the risk for Hedgers and Use Leverage)
Spread Options
(Only deal with Futures Contracts)
3
Commodities Vocabulary

• Bidindicating a desire buy
• Call OptionA option to buy on a futures contract
• Cash Commodityactual physical commodity(Actuals)
• Clearinghousesettles the trading accounts (third
  party to the trades)
• Commission Feecharged by the broker

4

• Commodityarticle of commerce(ag products,
  metals, petroleum, currency, financial
  instruments, precious stones, etc.)
• CFTC (Commodity Futures Trading
  Commission)federal regulatory agency that
  polices exchanges.
• Crop Yearfrom harvest to harvest
• Crop ReportsUS Dept. of Agriculture issues
  throughout the year.
• Daily Trading Limitmax. price range set by the
  exchange each day for a contract

5

• Equilibrium Pricemarket price at which the
  quantity supplied equals the quantity demanded.
• Expiration Datedate on which options on futures
  contracts expire.
• Fill-or-Killorder must be filled immediately or
  canceled.
• Floor Brokerone who executes the orders in the
  pit.
• Futures Contractlegally binding contract to buy
  or sell a commodity sometime in the future.

6

• Hedgingoffsetting price risk by taking an equal
  but opposite position in the futures market. (to
  protect against adverse price changes)
• Last Trading Dayfinal day when a trade can occur
  (commodity or futures contract)
• Leveragecontrol large amounts of a commodity for
  a small amount of capital.
• Limit Ordercustomer sets a limit on the price
  and/or time of execution.

7

• Market Order
• Offeran expression indicating ones desire to
  sell
• Optionconveys the right not the obligation to
  buy or sell futures contract
• Option Spreadsimultaneous purchase and sale of
  one or more contracts.
• Pittrading area on the floor
• Price Limit Orderspecifies the price at which a
  trade can be executed

8

• Put Optiongives the right but not the obligation
  to sell
• Settlement Pricelast price paid for a commodity
  on a trading day
• Speculatorsomeone who tries to profit from
  buying or selling futures and options by assuming
  risk
• Spreadprice difference between two related
  commodities
• Stop Orderorder to buy or sell when the market
  reaches a specified point.
• Time Limit Orderdesignates the time the order is
  executed.

9

• Time-stampedpart of order routing process in
  which the time of day is stamped on the order
• Underlying Futures Contractfutures contract that
  is bought or sold by exercising an option
• Volumenumber of purchases or sales of a
  commodity futures contract
• Yieldmeasure of annual return on an investment