Commodity futures contracts: glossary of terms
Keywords and phrases used to describe commodity futures markets
| Term | Definition |
|---|---|
| Arbitrage | The practice of exploiting price differentials between related assets across different markets to make risk-free profits. |
| Cost of carry | The cost of holding a position in a futures contract, including interest, storage, and other expenses. |
| Delivery date | The date the futures contract’s physical delivery or financial settlement occurs. |
| Exchange | An entity that acts as an intermediary in futures trading, ensuring contract performance, managing margin deposits, and reducing counterparty risks. |
| Expiration date | The final date when a futures contract must be settled by physical delivery, offsetting, or rolled over to a subsequent contract. |
| Futures contract | A standardized, legally binding agreement to buy or sell a specific asset at a predetermined price on a future date. |
| Hedging | A risk management strategy producers and consumers use to offset price fluctuations in the underlying asset through futures contracts. |
| Long position | A futures position where the trader agrees to buy the underlying asset at a future date, anticipating its price to rise. |
| Margin | A deposit required by exchanges from traders to cover potential losses on futures positions. The initial margin is the amount needed to open a position, while the maintenance margin ensures position viability. |
| Market maker | A trader or firm that provides liquidity by buying and selling assets at quoted prices in futures markets. |
| Open interest | The total number of outstanding futures contracts for a specific asset that have not been closed or delivered. |
| Regulatory oversight | Supervision and enforcement of rules by regulatory bodies to ensure fair trading practices, market integrity, and investor protection in futures markets. |
| Short position | A futures position where the trader agrees to sell the underlying asset at a future date, expecting its price to fall. |
| Speculators | Market participants seeking profits from price movements in futures contracts without the intention of physically delivering the asset. |
| Spot price | The current market price of the underlying asset for immediate delivery or settlement. |
| Volume | Volume is the total number of contracts traded on a particular futures market or contract during a specified period, usually a trading session or day. |
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