Glossary: Futures Market Terms
Glossary: Futures Market Terms
This glossary provides concise definitions for futures market concepts, trading terms, and regulatory language. Terms are organized alphabetically for quick reference.
Backwardation: A market condition where futures prices are lower than spot prices, often indicating tight current supply or high convenience yield.
Basis: The difference between the spot price and the futures price; calculated as Spot Price minus Futures Price.
Basis Risk: The risk that the futures price will not move in perfect correlation with the underlying asset being hedged, creating residual exposure.
Block Trade: A privately negotiated futures transaction executed outside the public auction market, subject to minimum size requirements.
Calendar Spread: A position involving the purchase of one futures contract month and the simultaneous sale of another month in the same commodity.
Cash Settlement: A settlement method where the contract is settled by cash payment based on the difference between the contract price and a final settlement price, rather than physical delivery.
Cheapest-to-Deliver (CTD): In physically-settled contracts with multiple deliverable grades, the security or commodity that is most economical for the short to deliver.
Clearinghouse: A central counterparty that guarantees performance of futures contracts, manages margin, and facilitates settlement.
Contango: A market condition where futures prices exceed spot prices, typically reflecting storage costs and financing expenses.
Contract Month: The calendar month in which a futures contract expires and delivery or cash settlement occurs.
Contract Size: The standardized quantity of the underlying asset represented by one futures contract.
Convenience Yield: The implicit benefit of holding physical inventory rather than a futures position, reflecting the ability to meet unexpected demand.
Conversion Factor: In Treasury futures, a multiplier that adjusts the invoice price to account for differences between the deliverable bond and the contract's notional coupon.
Day Trade Margin: Reduced margin requirements that apply to positions opened and closed within the same trading session.
Delivery: The process of transferring ownership of the physical commodity or financial instrument from seller to buyer at contract expiration.
Exchange for Physical (EFP): A transaction involving the simultaneous exchange of a futures position for a related cash market position.
First Notice Day: The first day on which a long position holder may receive notice of intent to deliver from a short position holder.
Forward Contract: A private, customized agreement to buy or sell an asset at a specified price on a future date, traded over-the-counter rather than on an exchange.
Front Month: The futures contract with the nearest expiration date, typically the most actively traded contract.
Initial Margin: The deposit required to open a futures position, serving as a performance bond against potential losses.
Last Trading Day: The final day on which trading may occur in a futures contract before expiration or delivery.
Leverage: The ability to control a large notional value with a relatively small margin deposit; calculated as Notional Value divided by Margin.
Maintenance Margin: The minimum account balance that must be maintained; falling below this level triggers a margin call.
Margin Call: A demand for additional funds when the account balance falls below the maintenance margin level.
Mark-to-Market: The daily process of valuing open positions at the current settlement price and crediting or debiting variation margin accordingly.
Notional Value: The total value of the underlying asset controlled by a futures contract; calculated as Contract Size times Price.
Open Interest: The total number of outstanding futures contracts that have not been closed, delivered, or offset.
Physical Delivery: Settlement of a futures contract through actual transfer of the underlying commodity or instrument.
Position Limit: The maximum number of contracts a trader or entity may hold, imposed by regulators or exchanges to prevent market manipulation.
Roll: The process of closing an expiring futures contract and opening a new position in a later-dated contract to maintain exposure.
Settlement Price: The official closing price determined by the exchange, used for margin calculations and marking positions to market.
SPAN: Standard Portfolio Analysis of Risk; a margin methodology that calculates requirements based on the worst-case loss across multiple scenarios.
Spot Price: The current market price for immediate delivery of a commodity or asset.
Spread: The simultaneous purchase and sale of related futures contracts, such as different months of the same commodity or different but correlated commodities.
Tick: The minimum price increment for a futures contract.
Tick Value: The dollar value of one tick movement per contract; calculated as Tick Size times Contract Size times Multiplier.
Variation Margin: The daily cash transfer between counterparties to reflect gains and losses from mark-to-market settlement.
This glossary is updated periodically. For detailed explanations, see the linked articles throughout the Futures and Forwards section, including Futures Contract Specifications and Standardization and Forward Contracts vs. Exchange-Traded Futures.