Call is an option contract that gives the holder the right to buy a specific volume of a commodity or security at a specific price (strike price) from the writer of the option on or before a specific date (expiration).
Collar is an option strategy designed to minimize or eliminate the up-front cost of a cap through the sale of a floor. Alternatively, the strategy may be used to minimize or eliminate the up-front cost of a floor through the sale of a cap.
Credit Risk is the risk that, in a financial or physical transaction, the counter-party will not perform in accordance with its contractual commitments.
Derivatives are financial instruments whose value is based on a commodity or security, e.g., futures, options, swaps, and forwards.
Hedge means to reduce a firm’s price risk relative to a position that the firm has or intends to take in the physical market.
Liquid Market refers to a market for financial instruments in which buying and selling can be performed with ease, due to the presence of a large number of buyers and sellers prepared to trade substantial quantities at small price differences. (The opposite is an illiquid market.)
Margin is the amount of money deposited as a guarantee of fulfillment of contract obligations. Initial margin is posted when a futures contract is opened. Variation margin is paid to maintain a minimum margin level based on daily fluctuations in the contract price.
Market Maker, also known as an intermediary, dealer, or issuer, is an entity that makes a market in an OTC instrument by offering to both buy and sell the instrument.
Mark-to-Market is the daily adjustment of the value of open positions to reflect gains and losses resulting from price movements occurring during the last trading session. This periodic review values all open positions in a portfolio at current market prices.
Master Swap Agreement is a contract between two derivative counter-parties that specifies all definitions, terms, conditions and laws governing any swap transaction. It enables the parties to execute one agreement and transact multiple swaps through appendices to that agreement, if necessary, rather than executing multiple agreements for multiple transactions.
Option is a contractual agreement between two counter-parties, where the writer (seller) grants a right to the buyer for a fee (premium) to buy or sell a commodity or security at a given price (the strike price) on or before a specific date ("American" option).
Over-the-Counter (OTC) is the purchase and sale of financial instruments when not conducted through an organized exchange.
Physical Market is the cash market in which the commodity is actually bought and sold.
Premium is the price paid for an option or instrument with an option-like feature.
Put is an option contract that gives the holder the right to sell a specific volume of a commodity or security at a specific price (strike price) to the writer of the option on or before a specific date (expiration).
Realized gain/loss is the amount of capital that has actually been received or paid out to counter-parties as a result of transactional activities.
Strike Price is the pre-determined price level at which an option is exercised.
Swap is a contractual agreement between two counter-parties to exchange fixed for floating payments on a given quantity of a commodity or security.
Value-at-Risk is a measure based on the observation that an instrument in a portfolio will deviate from its existing marked-to-market value within a defined certainty based on a statistical measure of volatility. VaR is used to measure the potential loss in a portfolio (or individual instrument) from adverse market price movements within a specific probability and time horizon. For speculative transactions or for transactions involving timing differences between purchases and sales, limits are usually defined such that the VaR of the portfolio (or individual instrument) does not exceed approved dollar levels. The basic calculation for VaR is cash x volatility x confidence factor.
Volatility is the degree to which the price of a commodity or security fluctuates around a mean value. It is usually measured as the variance or standard deviation of the price.