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  • Add-on rate-Interest rate that is added onto the principal amount. If you borrow $1 million at 5% for one year, the add-on interest is $50,000.


  • American option- Options that can be exercised on or any time before the expiration date.


  • Anticipatory hedge- An anticipatory hedge involves buying or selling contracts by commercial firms in anticipation of forthcoming cash market transactions.


  • Appreciation- When a currency appreciates, its value increases. If the U.S. dollar were to appreciate, for example, it would take more of another currency to purchase $1. Appreciation is the opposite of depreciation.


  • Arbitrage- Attempting to profit by exploiting price differences of identical or similar commodities or financial instruments on different markets or in different forms. Arbitrage opportunities (if they exist) provide riskless profit opportunities.


  • Arbitrage hedge- Sometimes referred to as a carrying charge hedge. An arbitrage hedge is motivated by the tendency for futures and cash prices to converge in the delivery month.


  • Arbitrageurs- A subclassification of speculators that try to profit by taking very short term positions in the market to take advantage of market anomalies. One who practices arbitrage.


  • Ask- The price that a seller is willing to accept for a futures or options contract.


  • At the money- In options, when the strike price equals the price of the underlying futures contract.


  • Bar chart- Bar charts are used by technicians to report price and volume data. Each day (or week or month) is represented by a single vertical line on the graph connecting the high and low prices to indicate the period's price range.


  • Basis- The principle measure for linking cash and futures prices. Calculated as futures price- cash price- futures.


  • Basis point- A basis point is also referred to as a tick. It is one-hundredth of a percentage point and is used for quoting bond yields or interest.


  • Bear vertical spread- A bear vertical spread involves selling an option with a relatively low strike price and buying an option with a relatively high strike price.


  • Bearish- A trader who is bearish expects prices to fall.


  • Behavioral Economic Model- A model in which irrational (and rational) behaviors are aggregated to produce a theory of price behavior in an orderly state.


  • Bid- The price that a buyer is willing to pay for a futures or options contract.


  • Black-Scholes- The Black-Scholes formula estimates theoretical options prices using factors such as price volatility, interest rates, strike prices, underlying futures prices, and time to expiry.


  • Board of governers- The board is elected from the futures and options membership and manages the day-to-day affairs of the futures and options exchange.


  • Bottom Fisher- Money manager, with no crystal ball, who favors stocks selling at the lowest prices relative to current cash flows.


  • Breakaway gap- Breakaway gaps, on bar charts, signal the beginning of a price move. They occur when futures price that's been moving sideways breaks out of the base with a gap.


  • Break-even price- For a call option the break-even price is equal to the strike price plus the premium. For a put option the break-even price is equal to the strike price minus the premium.


  • Broker- A person or firm that executes futures and options trades on the floor of the exchange on behalf of a public investor.


  • Bullish- A trader who is bullish expects prices to increase.


  • Bull vertical spread- Bull vertical spreads involve buying an option with a relatively low strike price and selling an option with a relatively high strike price.


  • Butterfly option spread- A strategy aimed at taking advantage of differences in time value erosion in options markets with relatively stable prices. This spread is created by buying one in the money call option, buying one out of the money option, and simultaneously selling two at the money options, all with the same expiration date.


  • Buyer- The buyer of a futures or options contract.


  • Buying pressure- Buying pressure occurs when more traders are trying to buy rather than sell futures or options contracts. The price will therefore tend to increase.


  • Call option- A call option gives the buyer of the option the right but not the obligation to buy the underlying futures contract at a specified price.


  • Call option buyer- As a speculator, a call option buyer expects futures prices to rise. As a hedger, protection from price increases is obtained by buying a call option.


  • Call option seller- A call option seller is neutral to bearish. The most a call option seller can earn is the premium less brokerage fees. The loss is theoretically unlimited as futures prices can continuously rise.


  • Carrying charge market- Also know as contango. A typical intertemporal price pattern that occurs when the prices for futures contracts with later maturity dates are higher than prices for contracts with earlier maturity dates.


  • Carrying charge hedge- Sometimes referred to as an arbitrage hedge. An arbitrage hedge is motivated by the tendency for the futures and cash prices to converge in the delivery month.


  • Cash delivery- The seller delivers the actual product or asset to the buyer.


  • Cash prices- Also known as spot prices. Cash prices refer to the actual market for immediate delivery of the physical commodity or financial instrument underlying a futures or options contract.


  • Cash settlement- Futures contracts that do not permit delivery, rather the contracts are settled at the cash price.


  • Ceiling price- A ceiling price can be established with options hedging, which creates a maximum price that a buyer will have to pay.


  • Chaos- Unpredictable turbulence resulting from interaction between particles, bodies, or beings.


  • Chartist- Also referred to as a technician. This term refers to those traders who use technical analysis and predict forthcoming prices from past price behavior.


  • Channel system- The goal of a technician's channel system is to look for a price breakout outside the range of past prices. The channel is defined by two trend lines drawn on a vertical bar chart.


  • Christmas Tree- The pattern of mean reversion in earnings growth rates.


  • Clearinghouse- The clearinghouse financially guarantees all contracts on the exchange and manages the financial settlement of futures and options contracts.


  • Combination systems- Combination systems include trading two systems simultaneously.


  • Commodity fund- Also referred to as a commodity pool. A commodity fund is a managed speculative futures fund similar to a mutual fund in either the stock or bond market. It pools investors' money and then trades futures and options contracts.


  • Commodity Futures Trading Commission- Abbreviated as CFTC, it is the U.S. government agency that regulates and oversees the futures industry.


  • Commodity pool- Also referred to as a commodity fund.


  • Common gap- A common gap is formed in a market with small trading volume.


  • Complexity- State of behavior lying between order and chaos where behaviors don't lock into place nor dissolve into turbulence.


  • Congestion areas- The area on a bar chart that contains a cluster of bars is referred to as a congestion area.


  • Contango- Also know as a carrying charge market.


  • Contrary opinion- A technical trading system based upon the concept that the crowd mentality is wrong and the market is either over-bought or over-sold.


  • Convenience yield- The convenience yield refers to the benefit (the convenience) of holding inventory.


  • Convertible currencies- Currencies that can be freely exchanged for another country's currency in the open market.


  • Cross hedging- Occurs when there is no futures contract corresponding to the underlying financial instrument or commodity. The hedger then hedges in other related futures market whose price movements are similar to those of the commodity or financial instrument being hedged.


  • Cross price elasticity- Measures the responsiveness of demand for one good to a given change in price of a second good.


  • Crystal Ball- Technology (subjective or quantitative) used to assess future prospects.


  • Cycles- Recurring patterns in production and prices that lasts more than one season.


  • Cyclical- Something that happens periodically, i.e., on a regular basis.


  • Delivery month- Indicates the month during which the futures contract expires.


  • Delta- Delta measures the relationship between the price of an underlying futures contract and the option premium. The delta is equal to the ratio of the price change of the option (i.e., the premium) over the price change of the futures contract. The absolute value of the delta lies between zero and 1.


  • Demand for storage- The demand for the provision of inventories to be carried forward through time.


  • Depreciation- When a currency depreciates, its value decreases. It is the opposite of appreciation.


  • Derivative- Contracts whose value depends on an underlying asset. Futures and options are both examples of derivatives.


  • Diamond Bar- Retirement destination for an investor in expensive  growth stocks.


  • Diamond Head- Retirement destination for an investor in cheap value stocks.


  • Discount- A bond is sold at a discount when it is traded at a price that is less than its par or face value.


  • Discount rate- The interest rate used in discounting future cash flows.


  • Double bottom- A technical chart pattern that shows a drop in price, then a rise, then another drop to the same price level.


  • Double top- A technical chart pattern that shows a rise to a high price, then a drop, and then another rise to the same high price.


  • Efficient- A market is efficient when futures and options contract prices fully reflect all available information at any point in time.


  • Elasticity- The percent change in quantity (demanded or supplied) divided by a percentage change in the market price.


  • Elasticity of demand- Measures the responsiveness of demand to a given change in price. It is negative.


  • Elasticity of supply- Measures the responsiveness of supply to a given change in price. It is positive.


  • Elliott wave theory- A technical trading theory based on the belief that there is a rhythm in nature that spills over into all aspects of life, including futures markets.


  • Error-Driven Volatility- Stock volatility induced by over and under reactions of stock prices to real economic events.


  • Eurodollars- Deposits of U.S. Dollars in foreign banks or foreign branches of U.S. banks.


  • European option- An option that can only be exercised on the date of expiry.


  • Event-Driven Volatility- Stock volatility induced by instantaneous and unbiased market price reactions to real economic events.


  • Exchange rate- The rate at which one country's currency can be converted into the currency of another country.


  • Exchanges- Organized futures and options market.


  • Exercise price- Also know as the strike price. It is the pre-established price that the buyer of a call option can purchase a futures contract at (or the price the buyer of a put can sell at).


  • Exhaustion gaps- Exhaustion gaps, in bar charts, signal the end of a price move.


  • Expectations theory- A possible explanation for the shape of the yield curve.  This theory states thet the shape of the yield curve is a market forecast of the forth coming spot interest rate.


  • The Fantasy- Belief that stock prices always adjust to reflect the appearance of new and relevant information in an instantaneous and un-biased manner.


  • Farmgate prices- Prices received by farmers at the point of production.


  • Fibonacci series- This series is created by summing the previous two numbers in the series to get the next number. The series is 0,1,1,2,3,5,8,13,21, etc.


  • Filter systems- A system used by technicians that indicates trade signals given by trailing stops.


  • Fiscal policy- The government's expenditures on goods and services and the way in which the government finances these expenditures ( through borrowing or taxes).


  • Flexible exchange rates- Also known as floating exchange rates. Under flexible exchange rates, supply and demand determine the value of a currency.


  • Floor price- A minimum price the will be received. Created through options hedging.


  • Forward contract- A forward contact is a contract calling for the future delivery of a commodity or asset at a specified price and at a set time period.


  • Fossil- A piece of evidence that contradicts the efficient market hypothesis (EMH).


  • Fundamental trader- Fundamentalists focus on evaluating supply and demand in a attempt to forcast the direction of price movements.


  • Futures contract- An obligation to buy or sell a specific quantity and quality of a commodity or financial instrument at a certain price, and at a specified future date.


  • FX- The abbreviation for foreign exchange.


  • Gap- A space on a bar chart between the high price of one day and the low price of the next day, or vice versa.


  • Globalization- A term that describes a growing trend towards internationally integrated markets and the free movement of goods, services, and factors of production.


  • GO- The golden opportunity to go to Diamond Head rather than Diamondd Bar.


  • Great Hall of Divine Saviors- Shrine dedicated to the worship of preposterous interpretations of evidence contradicting the efficient market hypothesis (EMH).


  • Growth Stock- A stock selling at an expensive price relative to current cash flow, earnings, dividends, book value, and for which earnings per share might be expected to grow at a faster than average rate for a relatively short time into the future.


  • Growth Train (1)- Revision in standards for valuing stocks that occurred in the late 1920s.
  • Growth Train (2)- Revision in standards for valuing stocks that occurred in the early 1960s.


  • Head and shoulders formation- Patterns resembling the head and shoulders outline of a person that are used by technicians to chart and forecast price trends.


  • Hedging- Participating in the futures or options markets to neutralize the effects of commodity or financial price risk. Individuals who hedge are referred to as hedgers.


  • Heretic- A true disbeliever in 'The Theory' and 'The Fantasy'.


  • Holy temple of Efficient Markets- Building located at 1101 E. 58th St., Chicago, Illinois.


  • Horizontal spread- Created by holding opposite positions in two futures contracts with different delivery date.


  • Hot Shots- Believers, in the late 1920s, in the new standards for valuing growth stocks.


  • Implied volatility- Volatility expectations currently built into an option's premium. It can be estimated with the Black-Scholes formula.


  • Index futures- Futures contracts based upon indices such as the S&P 500 stock market index. These contracts are cash settled.


  • Interest rate parity- The relationship between international interest rates and exchange rates.


  • Intertemporal- Intertemporal means across time. It is one of the dimensions to cash and futures price relationships.


  • In the money- An option is in the money if there is some revenue that can be realized by exercising the option. If an option is in the money then it must have intrinsic value.


  • Intrinsic value- The difference between an option's premium and its time value. A call option has intrinsic value when the current futures price is above the strike price. A put option has intrinsic value when the strike price is above the futures price.


  • Inverted markets- Occurs when futures contracts for the nearer months are trading at a price premium to the more distant months.


  • Law of demand- Property of demand curves. If the market price rises, consumers buy less of the good or commodity, holding everything else constant.


  • Law of one price- The law of one price says that there is one price for a commodity, or financial asset the cash price of the underlying asset, and all other prices are related to that price through storage transformation, and transport costs.


  • Liquidity preference theory- A possible explanation for the shape of the yield curve. This theory states that the shape of the yield curve is affected by a liquidity premium between long and short-term securities. It maintains that long-term interest rates exceed short-term interest rates because investors prefer shorter maturities.


  • Liquidity premium- An extra component of yield on a financial instrument. The forward  rate minus the expected futures short-term interest rate.


  • London Inter-Bank Offered Rate (LIBOR)- The 90-day deposit rate on U.S. Dollars traded between banks in London. The LIBOR is the yield on Eurodollar futures.


  • Long- To have bought a futures or options contract.


  • Long call- A long call gives the buyer of the option the right, but not the obligation, to buy the underlying futures contract at a specified price.


  • Long hedge- A long hedge is taken when the hedger currently holds a short cash position and seeks protection from falling prices by taking a long position in futures or options.


  • Long put- A long put gives the buyer of the put the right, but not the obligation, to sell the underlying futures contract at a specified price.


  • Margin call- A futures or options trader will receive a margin call when the market has moved unfavorably against his position. The trader must then deposit additional funds to bring the balance back up to the original margin deposit.


  • Margin deposit- A good-faith deposit a trader must make when buying or selling futures or options. If futures prices move adversely, the trader must deposit more money to meet margin requirements.


  • Market- A place or situation that puts sellers and buyers in communication with each other and presents the opportunity for them to trade.


  • Market Beta- Sensitivity of an individual stock's return to changes in the aggregate market return.


  • Market segmentation theory- An explanation for the shape of the yield curve. This theory states that there are separate markets for short-term, medium-term, and long-term securities and interest rates are determined by the supply and demand conditions in each market.


  • Monetary policy- Refers to actions taken by the central government to influence the amount of money and credit in the economy.


  • Moving averages- A technical analysis term meaning the average price over a specified time period. Used to identify trends in prices by flattening out noisy price fluctuations.


  • Naked option- Also known as uncovered options. When a trader sells (i.e., writes) an option for underlying futures contracts, which the writer does not own at the time, he is selling a naked option.


  • Neckline- The neckline is a part of the head and shoulders formation used in technical trading. It is formed during the correction of a price advance that represents the head.


  • Net cost of storage- The net cost of storage is a function of three components: physical cost of storage, a risk aversion factor, and the convenience yield. Net cost = physical cost of storage + risk aversion - convenience yield.


  • New Finance- Belief that conclusions about the nature of pricing in financial markets should be based on straightforward empirical estimation rather than theoretical constructs that aggregate from individual behaviors.


  • Neutral hedge ratio- The reciprocal of a delta. It is an estimate of how many option contracts must be held by a hedger in order to offset price changes in the underlying cash market.


  • Nonstorable- Commodities are considered nonstorable if they cannot be held on to and used in future time periods. They are perishable.


  • Old Timers- Nonbelievers, in the late 1920s, in the new standards for growth stock investing.


  • Open interest- The number of open futures contracts for which a trader remains obligated to the clearinghouse because of no offsetting purchase or sale has been made yet. Open interest can either be the number of open longs or the number of open shorts.


  • Operational hedge- Operation hedges facilitate commercial business by allowing firms to buy and sell on the futures markets  as temporary substitutes for subsequent cash market transactions.


  • Optimal hedge ratio- The ratio of the number of futures contracts purchased or sold to the size of the cash position being hedged. It represents the most desirable combination of cash and futures positions.


  • Option hedge ratio- Equal to the futures hedge ratio x  neutral hedge ratio- It is also equal to the futures  hedge ratio x 1/delta.


  • Option straddles- This position is taken by either going (a long option straddle) or short (a short option straddle) in both a put and a call.


  • Options- An option gives the buyer the right, but not the obligation, to exercise the option and obtain a long or short position in a futures contract at a predetermined price. There are two types of options: calls and puts.


  • Oscillators- A family of technical indicators based on price changes rather than price levels.


  • Out of the money- If an option is out of the money there is no intrinsic value and the premium consists solely of time value. A put option is out of the money when the futures price is greater than the strike price. A call option is out of money when the futures price is less than the strike price.


  • Overbought- A market that is rising too fast, according to technical rules.


  • Oversold- A market that is falling too fast, according to technical rules.


  • Over-the-counter swaps- Financial swaps that are bought and sold outside an exchange.


  • Par delivery- A par delivery point is a cash market where no deductions (premiums) are taken from (added to) the futures contract price upon settlement.


  • Par value- Also referred to as face value. A bond trades at par when the coupon rate is equal to the interest rate.


  • Payoff line- A line that graphically shows the profits/losses to futures and options contracts as the futures price changes.


  • Pennant- In technical analysis, a chart pattern that occurs when the trading range formed by successive highs and lows narrows over time.


  • Point-and-figure (P&F)- A chart used by technicians that plots price movements only, without measuring the passage of time.


  • Premium- In options markets, the price paid for the rigt to buy or sell a futures contract.


  • Price-Driven Volatility- Stock volatility induced largely by reaction to changes in the market's estimate of its volatility.


  • Price inelastic- If a commodity is price inelastic, its demand expands by less than 1% when it price falls by 1%.


  • Price of storage theory- This theory is used to explain the pattern of intertemporal price relationships among futures contracts for a storable commodities. It predicts the intertemporal price relationships are determined by the net cost of carrying inventory.


  • Price seasonality- Occurs in markets that exhibit recurring seasonal price patterns.


  • Price volatility- A measure of price risk, usually estimated by the standard deviation of the price.


  • Privileges- Privileges are an older form of futures contracts. They are very similar to modern futures with the major difference being that privileges were normally of a shorter duration.


  • Purchasing power parity (PPP) theory- This theory is based on the concept that goods and services in different countries should cost the same when measured in a common currency. If goods do not cost the same then the country's currency is either under or overvalued.


  • Put option- A put option gives the buyer of the option the right, but not the obligation, to sell the underlying futures contract at a specified price.


  • Put option buyer- as a speculator, a put option buyer expects prices will fall. As a hedger, the put option buyer seeks protection against prices falling below the strike price. The maximum loss is the premium plus brokerage fees. There is no limit on the potential gain.


  • Put option seller- A put option seller is neutral to bullish on prices. The maximum profit is the premium less brokerage fees. The maximum loss is limited to the total value of the futures contract.


  • Put-call parity- The relationship between the price of a put and a call option on the same futures contract with the same strike price. If this relationship does not hold, there are arbitrage opportunities.


  • Random walk- The Random walk theory implies that day-to-day price changes are random and forthcoming prices cannot be predicted from past price behavior.


  • Rational Economic Model- Model in which rational behaviors are aggregated to produce a theory of price behavior in an orderly state.


  • Real Information Set- Any information relevant to the pricing of stocks other than the stock price history.


  • Real rate of interest- The difference between the nominal rate of interest and the expected rate of inflation.


  • Repo rate- Repo is short for repurchase and the repo rate is the rate of interest in a repo transaction. The interest rate difference between the futures and spot price is an implied repo rate.


  • Reserve requirements- In the United States the Federal Reserve Bank requires that financial institutions hold a certain percentage of deposits on reserve.


  • Resistance area- Congestion areas in the middle of a trend as identified by technical traders. Resistance is the inverse of support.


  • Risk premium- The risk premium is the financial reward that an investor earns for holding a risky asset rather than a risk-free one.


  • Rodeo Driver- Fictitious money manager, with no crystal ball, who favors stocks selling at the highest prices relative to current cash flows.


  • Rollover hedging- Hedging over a long time horizon by using a series of futures contracts. The hedger takes either long or short position, closes the position at expiry, then opens another position and again closes the position at expiry, The hedger repeats this until the desired time frame is covered.


  • Round bottom- A formation produced by the gradual reversal of a price trend on technical charts.


  • Round top- A formation produced by the gradual reversal of a price trend on technical charts.


  • Runaway gaps- A runaway gap in a bar chart is approximately the midpoint of a  price move.


  • Seasonal- Variations in business or economic activity that recur with regularity.


  • Seasonal pattern- Any systematic pattern in prices within a marketing year.


  • Selling pressure- Selling pressure occurs when more traders are trying to sell rather than buy futures and options. This will tend to drive prices down.


  • Semi-strong efficient- if a market is semi-strong efficient then prices reflect all publicly available information.


  • Short- To sell futures or options contract.


  • Short call- To sell a call option.


  • Short hedge- A short hedge is taken when one holds a long cash position and at the same time takes a short position in the futures market.


  • Short put- To sell a put option.


  • Sideways movements- Sideways movements on bar charts created during temporary periods of market stability around a certain price level.


  • Speculating- Speculators participate in the futures and options markets with the sole intention of making a profit.


  • Spot prices- Also known as cash prices. The spot price is the price for immediate delivery.


  • Spread trading- Spread trading involves taking simultaneous positions in two different contracts rather than taking an outright long or short futures position.


  • Storable- A commodity is storable if it can be stored for use in future time periods.


  • Strike price- Also known as the exercise price. This is the predetermined price that the underlying commodity or asset is bought or sold at when an option is exercised.


  • Strong-form efficient- If a market is strong form efficient, then private information is fully reflected in prices.


  • Student T-Statistic- Mean value divided by its standard error.


  • Supply- The total amount of a good or service available for purchase.


  • Supply of storage- Refers to the supply of commodities as inventories.


  • Support area- Congestion area in the middle of a trend on a technician's chart. Support is typically found at a level where a bottom was formed during a previous price decline.


  • Swap- An agreement between two parties whereby each party agrees to initially exchange an asset and then re-exchange assets at a later date. Swaps can be used to either hedge or speculate and they are instruments than are commonly used in foreign currency and bond markets.


  • Synthetic call- Created by simultaneously holding a long cash position and purchasing a put option. It mimics a call option.


  • Synthetic put- Created by simultaneously holding a short cash position and purchasing a call option. It mimics a put option.


  • Technical trading- The use of historical prices to predict forthcoming price behavior.


  • Technicians- Also referred to as chartists. This term refers to those who use technical analysis.


  • Texas hedge- A Texas hedge is not actually a hedge but is instead a large speculative position.


  • The Theory (alias CAPM, SLM, SLB, SLFB, etc.)- Belief that all investors portfolios that have mean-variance properties consistent with those found with 'The Tool'.


  • Theory of normal backwardation- This theory explains how positive carry markets have price differences between contracts that are insufficient to cover full costs of storage. This theory says that hedgers must compensate speculators for assuming the price risk associated with holding futures contracts.


  • Theory of price storage- This theory developed by Holbrook Working says that intertemporal price relationships are determined by the net cost of carrying stocks.


  • Thin market- A thin market is one that is inactive or illiquid. In such a market the volume of trading is small, there are relatively few transactions per unit of time and price fluctuations are high relative to the volume of trade.


  • Time decay- This term refers to how the time value of an option decays as expiry approaches.


  • Time value- Time value reflects the market's expectations concerning the prospects of an option having intrinsic value before expiry. It is the premium minus the intrinsic value.


  • The Tool- Procedure to find the portfolios with the lowest possible volatility of return given an objective for expected return.


  • Tradable- Goods are tradable if they can be consumed away from the point of production.


  • Trading system- Trading systems or technical forecasting models used to generate buy and sell signals.


  • Uncovered option- Also known as a naked option.


  • Value Stock- A stock selling at a cheap price relative to cash flow, earnings, dividends, book value, and for which earnings per share might be expected to grow at a slower that average rate for a relatively short time in the future.


  • Vertical spreads- An option strategy involving the simultaneous purchase and sale of options of the same commodity or asset and expiration date but with different strike prices.


  • Volume- The number of contracts traded over a given time interval.


  • Weak form efficient- If a market is weak form efficient, then past prices contain no information about forthcoming prices and price changes are random.


  • Writer- The writer of an option is the person selling the option.


  • Yield- The average rate of return or the interest rate.


  • Yield curve- The yield curve is the relationship between yield and term to maturity.


  • Zealot- A true believer in 'The Theory', or 'The Fantasy', or both.


Finance