Glossary of Terms

American option: An option that can be exercised at any time during its life.

Asset: Resource with market value; a unit of wealth capable of earning an income.

Backwardation: A price structure whereby the futures price of a commodity is lower than the spot price.

Beta: A ratio measuring the sensitivity of an individual asset price to that of the overall market. A stock that tends to go up even more rapidly than the market when it is rising, and drops more precipitously when it is falling, is described as “high beta”; one that moves less violently than the market is “low beta”.

Bear: Investor who expects the price of an asset or assets in general to fall.

Bid Ask quotations: Bid represents the highest price a buyer is willing to pay; Ask price is the lowest price a seller will accept. The two together are referred to as a quotation or quote.

Bonds: IOUs issued by a borrower which normally promise repayment of the money on a set date (the maturity) with regular interest payments during the life of the bond. The riskier the issue, the higher the interest rate (or yield) on the bond.

Bull: Investor who expects the price of an asset or assets in general to rise.

Call option: An option to buy an asset for a certain price by a certain date.

Cash price: The price of a commodity for immediate cash settlement (similar to spot price).

Central bank: A body established by a national Government to regulate currency ad monetary policy on a national-international level.

Commodity: A raw material, such as crude oil or copper, that is usually traded in bulk.

Cost-of-carry: The storage cost plus the cost of financing an asset.

Commercial bank: Banks that focus on taking in money in the form of deposits and lending it out to individuals and business.

Commercial: Someone who deals with the physical underlying commodity or asset for commercial purposes.

Contango: A price structure whereby the futures price of a commodity is higher than the spot price.

Convergence: When the measured distance between two asset prices narrows.

Cover: Buying a security (or asset) previously sold short.

Curve: The relationship between different prices of the same asset, put into graphic form. A steep slope curve represents wider differences between prices; a gentle slope curve represents narrow differences between prices.

Debt: Money owed from someone else, whether a bank, a company or a person.

Deferred: Refers to a later date or time.

Deflation: Falling prices across an entire economy.

Delivery period: The time period in the futures market during which the seller must deliver to a specified location, and the buyer must accept and pay for the underlying asset.

Demand: The request for an asset.

Derivative: A financial instrument which derives its value from the value of an underlying asset.

Discount: When an asset is priced lower than another asset.

Disinflation: A situation where prices across the economy are rising, but more slowly than before, e.g. - a fall in the annual inflation rate from 8% to 4%. Not to be confused with deflation.

Diversify, diversification: The spreading of investments over a range of assets with different degrees of risk in a portfolio.

Dividend: A regular payment made by a company to its shareholders.

Divergence: When the measured distance between two asset prices widens.

Equity, equity securities: A share in the capital or net assets of a company.

European option: An option that can be exercised only at the end of its life.

Exercise price: The price at which an underlying asset may be bought or sold in an option contract (also called the strike price).

Expiration date: The end of the life of a contract.

FED: The group of officials (the Federal Reserve Board) who control the US government’s central banking system (the Federal Reserve System).

Federal Reserve System: The central bank of the United States of America.

Forwards, forward contract: A contract that obligates the holder to buy or sell an asset for a predetermined delivery price at a predetermined future time.

First notice day: The day after which the holder of a futures contract may be required to take physical delivery of the underlying commodity.

Futures contract: A legal agreement to buy or sell a particular commodity asset, or security, of a standardized quantity and quality, at a price set today for delivery on a specified date in the future. The buyer of a futures contract is obligated to buy and receive the underlying asset for future delivery, while the seller is obligated to provide and deliver the underlying asset for future delivery. A futures contract is a derivative because it derives its value from the value of the underlying asset.

Hedge, hedging: A trade designed to reduce risk.

Implied volatility: The market’s expectation of future price volatility as implied by prevailing option prices.

Inter-commodity spread: The price difference between two related commodities. For example, wheat vs corn.

Intra-commodity spread: The price difference between two different months of the same commodity asset, on the same exchange. For example, September crude oil vs December crude oil, on the NYMEX exchange.

Investment: The purchase (ownership) of a financial asset.

Liabilities: Something owed to other.

Leverage: Investing, or speculating, with borrowed money or by putting down only a small part of the purchase price.

Liquidity: The ability of a market in a particular security, or asset, to absorb a reasonable amount of buying and selling at reasonable price changes.

Long call: Purchase of a call option.

Long position: A position involving the purchase and ownership of an asset.

Long put: Purchase of a put option.

Margin: The amount paid by an investor when purchasing, or short selling, an asset or security.

Margin call: When an investor is asked to pay more money to hold a position.

Naked option: A short option position by an investor who does not own the underlying asset.

NASDAQ: National Association of Securities Dealers Automated Quotation System. A US securities market.

Option, option contract: The right, but not the obligation, to buy or sell an asset at a specified price within a specified time.

Open interest: The number of contracts, or commitments, outstanding than have not been settled. For each contract there must be one buyer and one seller, so when a contract is opened (created) between the buyer and seller, then open interest rises by one. The contract is open until one party closes it, at which point the open interest drops by one.

Portfolio: A mixture of financial assets constituting the holdings of wealth of an individual or institution.

Profit: A positive return. Selling an asset at a price that was greater than was paid for.

Put option: An option to sell an asset for a certain price by a certain date.

Premium: When an asset is priced higher than another asset.

Risk: The possibility that events might not turn out as expected.

Risk aversion: Choosing assets with little risk of either capital loss or an uncertain future.

Risk premium: The extra return investors demand for holding risky assets such as equities, compared with the return they get on risk-free assets such as cash or government bonds.

Short call: Selling short (also known as writing) a call option.

Short put: Selling short (also known as writing) a put option.

Short sale, short position: A position involving the sale of an asset without owning it, with the intention of buying it at a lower price.

Speculator: A person who takes a risk by buying and selling in the hopes of profiting from price movements.

Spot market: A market in which assets are traded for immediate delivery.

Spot price: The present price of an asset for immediate delivery.

Spread: The measured distance between two asset prices, or interest rates.

Spread decreasing: The price difference between two futures contracts is narrowing.

Spread increasing: The price difference between two futures contracts is widening.

Stock market: A physical and electronic market in which government bonds and the securities of companies are regularly traded.

Stock option: Option on a stock.

Stock: Equity capital of a corporation.

Strike price: The price at which the underlying asset may be bought or sold in an option contract (also called the exercise price).

Suppliers: Providers of assets.

Supply: The quantity of assets available.

Surplus: An amount left over when requirements are met.

Thin market: A market in which there are comparatively few bids to buy or offers to sell or

both. Insufficient volume for efficient trading.

VIX index: Index of the volatility of the S&P 500.

Volatility: A measure of price variability in a market. A volatile market is a market that is subject to wide price fluctuations.

Volatility index: An index of uncertainty.

Volume: The number of times an asset or share traded hands.

Writing options: Selling short an option without owning it.

Yield: A return provided by an instrument or investment.

Yield curve: The relationship between interest rates and their maturities. Also known as the term structure of interest rates.

Yield spread: The difference between the yields on bonds of different riskiness. Also known as risk spread.