What does the expression mean?
Below you will find a glossary of frequently used terms and phrases.
A trading strategy based on the simultaneous purchase and sale of the same commodity in two different markets in order to profit from location, product, timing, or price discrepancies. See also “Spread”.
The price at which a dealer is willing to sell foreign exchange, securities or commodities. Also called the“offer price”.
Market where prices are declining.
Market where prices are increasing.
Bid and Ask
Prices offered to buy and sell respectively, on spot market deals. An interested party can sell at the bid price and buy at the asked price. Spot prices are not reported as a straight number, but rather, in terms of bid and ask.
Forward agreement to purchase or sell bunker oil at a predetermined price. The initiation of an opposite futures position to protect a cash market position from an adverse price movement. See also “Hedge”.
A right, but not an obligation, to buy an underlying instrument at a predetermined price.
Risk management strategy that involves the purchase of a call option, which offers protection against rising fuel prices, but retain the possibility to gain a profit when prices fall. Caps are offered against payment of an upfront premium.
The settlement of futures or options through payment of a cash difference, rather than taking/making physical delivery.
A combination of selling a put option and buying a call option (or opposite), where you eliminate an unfavourable direction in prices, but at the same time limit the opportunity to gain a profit when prices develop favourable.
A spread that traders implement to play the price relationship between crude and refined products.
An agreement to exchange the currencies, securities or commodities at a specific future date and a predetermined forward rate.
The basic forward price of a commodity is determined by the following equation:
Forward price = Spot Price + Cost of Carry – Convenience Yield.
Fixed Price Agreement
A forward agreement to purchase or sell a commodity at a predetermined rate. See extended info on Fixed price Agreements.
A standardized contract for the future purchase or sale of a commodity on a formalized exchange. In other words, an agreement to make or take delivery of a commodity at a fixed date or strip of dates in the future, at a price agreed upon at the time of dealing.
The purchase of a contract or tangible good that will rise in value and offset a drop in value of another contract or tangible good. Hedges are undertaken to reduce risk by protecting the owner from loss. Buyers and sellers can hedge.
The returnable collateral required to establish a hedge position. Margin at Wikipedia.
A deposit made as security for a financial transaction otherwise financed on credit. Margin at Wikipedia.
A contract giving the buyer the right, but not the obligation, to buy or sell a given amount of an underlying asset at a fixed price per unit for a specified time period. A European option can only be exercised on the day on which it expires, whereas an American option can be exercised at any time up to, and including, the expiration date. Option at Wikipedia.
Over the counter market (OTC). Opposite to trading over an exchange, the counterparties individually agree on the terms when trading OTC.
Paper Hedge Agreement. Financial tools for risk management with cash settlement.
Contract where buyer and seller agree to settle through physical delivery of the underlying asset following expiration.
A right, but not an obligation, to sell the underlying instrument at the predetermined strike price.
Risk Management means having in place a corporate and systematic process for evaluating and addressing the impact of risks in a cost-effective way - along with the appropriately-skilled staff to identify and assess the potential for risk to arise.
The act of selling a futures contract or holding an obligation to deliver a physical product. Traders are said to be “short” when they have contracted to sell more than they have contracted to buy.
The current value of a product.
The difference between the bid (buying) quote and the ask (selling) quote, or the simultaneous purchase and sale of two futures contracts to capitalize on the anticipated fluctuations in the price differential between the contracts. See also arbitrage.
The agreed price where the buyer of an option holds the right to buy or sell the underlying asset at expiry.
An arrangement to exchange cash-flow between a fixed price and the average of a floating price on a predetermined commodity. The buyer of a swap secures himself against rising prices.
The cash settlement of the difference between the agreed fixed price and the average of the floating price for the predetermined commodity and period.
A statistical measure of the maximum loss on the company’s positions within a given period with a given probability.
Zero cost collar
In a zero cost collar, the call and put option levels are calculated to result in no premium payment. In other words the premium paid for the bought option is counterbalanced by the premium received on the sold option.