Allowances are deviations from the basis grade or location allowable when delivering commodities under the terms of a futures contract. 

London Cocoa Futures and Euro Cocoa Futures

London Cocoa Futures and Euro Cocoa Futures: Allowances & Discounts

Allowances are a deviation from the basis grade or location allowable when delivering commodities under the terms of a futures contract. They are the permissible deviations in product quality and delivery location to the contract stipulations that are permitted before violating the terms of the futures contract. When entering into futures contracts, the buyer and seller agree ahead of time on important terms such as the quantity of commodity being purchased, the price paid by the buyer, and the date and location for delivery. The formula used is based on a standard deviation calculation whereby the average number of beans per 100g for the whole delivery unit is measured and then compared against the overall variability of bean sizes within the delivery unit. For instance, a commodity such as coffee beans might use statistical methods to estimate the number of beans delivered, whereas a futures contract for gold might rely on the counting and testing of individual gold bars.

Allowances

An assignable contract has a provision allowing the holder to give away the obligations and rights of the contract to another party or person before the contract's expiration date.

Table of Contents
What Is an Assignable Contract?
Understanding Assignable Contracts
Assignment of a Futures Contract
Factors in the Futures Market
Unwinding Futures Contracts
Real Estate Assignment
Example of an Assignable Contract
An assignable contract is a provision allowing the holder of a contract to transfer or give away the obligations and rights of the contract to another party or person before the contract's expiration date. If an investor holds a futures contract and the holder finds that the security has appreciated by 1% on or before the closing of the contract, then the contract holder may decide to assign the contract to a third party for the appreciated amount. An assignable contract has a provision allowing the holder to give away the obligations and rights of the contract to another party or person before the contract's expiration date. Assignable contracts provide a way for current contract holders to close out their position, locking in profits or cutting losses, before the expiration date of the contract.

Assignable Contract

Backwardation is when futures prices are below the expected spot price, and therefore rise to meet that higher spot price.

Backwardation is when the current price, or spot price, of an underlying asset is higher than prices trading in the futures market. Since the futures contract price is below the current spot price, investors who are net long on the commodity benefit from the increase in futures prices over time, as the futures price and spot price converge. Should a futures contract strike price be lower than today's spot price, it means there is the expectation that the current price is too high and the expected spot price will eventually fall in the future. For example, when futures contracts have lower prices than the spot price, traders will sell short the asset at its spot price and buy the futures contracts for a profit. When futures prices are higher than current prices, there's the expectation that the spot price will rise to converge with the futures price.

Backwardation

Basis differential is the difference between the spot price of a commodity to be hedged and the futures price of the contract used.

Basis differential is the difference between the spot price of a commodity to be hedged and the futures price of the contract used. For example, the difference between the Henry Hub natural gas spot price and the corresponding futures price for a natural gas contract in a specified location is the basis differential. For example, the difference between the Henry Hub natural gas spot price and the corresponding futures price for a natural gas contract in a specified location is the basis differential. As a general rule, when the spot price increases by more than the futures price, the basis differential rises, which is called strengthening of the basis. Basis differential is the difference between the spot price of a commodity to be hedged and the futures price of the contract used.

Basis Differential

A basis quote is the difference in price between a given futures contract and its underlying asset.

A basis quote is a way of quoting the price of a futures contract by comparing it to the price of its underlying asset. Given these various factors, it is often easiest to simply use basis quotes when referring to the price of a given futures contract in order to quickly tell whether the price of the underlying asset is above or below its futures price. If the index that serves as its underlying asset is at $105, then the basis quote for that equity index futures contract would be $100 – $105 = –$5.
In this scenario, the futures contract is cheaper than its underlying asset, creating a negative basis quote. When discussing most futures contracts, basis refers to the futures price of a contract minus the spot price of that contract's underlying asset. However, when discussing commodity futures contracts, it has the opposite meaning, referring to the spot price of the commodity minus that commodity's futures price.

Basis Quote

Buying on margin is the purchase of an asset by paying the margin and borrowing the balance from a bank or broker. 

Buying on margin occurs when an investor buys an asset by borrowing the balance from a bank or broker. The broker sets the minimum or initial margin and the maintenance margin that must exist in the account before the investor can begin buying on margin. If the investor does not comply, the broker may sell off the investments held by the investor to restore the maintenance margin. If the investor had not used margin for their initial investment, the investor would still have lost money, but they would only have lost 50% of their investment—$2,500 instead of $5,000. At this point, the investor is required by the broker to deposit funds to bring the balance in the account to the required maintenance margin.

Buying On Margin

The Calmar ratio compares the average annual compounded rate of return and the maximum drawdown risk of commodity trading advisors and hedge funds.

The Calmar ratio is a gauge of the performance of investment funds such as hedge funds and commodity trading advisors (CTAs). Still, the risk-adjusted nature of the Calmar ratio makes it among many possible investment performance measures, though it is one of the lesser-known gauges of risk-adjusted returns. The Calmar ratio is a measure of risk-adjusted returns for investment funds, created by fund manager Terry Young in 1991. The Calmar ratio uses a fund’s maximum drawdown as its sole measure of risk, which makes it unique. In addition, even though it is updated monthly, the Calmar ratio's standard three-year time frame makes it more reliable than other gauges with shorter time frames that might be more affected by natural market volatility.

Calmar Ratio

A carrying charge is a cost associated with holding a physical commodity or financial instrument.

A carrying charge is a cost associated with holding a physical commodity or financial instrument. If the carrying charges associated with that commodity are $2 per month, and its one-month futures price is $55, then an investor could make a $3 arbitrage profit by simultaneously buying the commodity at the spot price and selling it for delivery in one month at its one-month futures price. This is because, by purchasing a futures contract instead of buying the commodity today, the buyer of the futures contract is essentially benefiting from not having to incur those carrying charges until the futures contract’s settlement date. For example, under normal market conditions, the price of a commodity futures contract will include not only its spot price but also the carrying charges involved in storing it. In this example, it was made possible because the market did not accurately reflect the carrying charges of the commodity in the price of its one-month futures contract.

Carrying Charge

The cash price is the actual amount of money that is exchanged when commodities are bought and sold in the real world.

The cash price is the actual amount of money that is exchanged when commodities are bought and sold in the real world. For example, a one-month futures contract for oil, which will expire next month, could have a very different price than the cash price for oil (which is what oil costs to purchase today). In other words, when a futures contract expires, the price of the futures contract at expiry is nearly the same as the cash spot price. The price of a commodity with a futures contract can be very different from the cash price of the same commodity on any given day. If prices are notably different, there is an arbitrage opportunity between the futures price and the cash price at expiration.

Cash Price

Cash settlement is a method used in certain derivatives contracts where, upon expiry or exercise, the seller of the contract delivers monetary value.

A cash settlement is a settlement method used in certain futures and options contracts where, upon expiration or exercise, the seller of the financial instrument does not deliver the actual (physical) underlying asset but instead transfers the associated cash position. A cash settlement is a settlement method used in certain futures and options contracts where, upon expiration or exercise, the seller of the financial instrument does not deliver the actual (physical) underlying asset but instead transfers the associated cash position. A cash settlement is a settlement method used in certain futures and options contracts where, upon expiration or exercise, the seller of the financial instrument does not deliver the actual (physical) underlying asset but instead transfers the associated cash position. To circumvent this, futures and options contracts can be conducted with a cash settlement, where, at the end of the contract, the holder of the position is either credited or debited the difference between the initial price and the final settlement. For example, the purchaser of a cash-settled cotton futures contract is required to pay the difference between the spot price of cotton and the futures price, rather than having to take ownership of physical bundles of cotton.

Cash Settlement

The Chicago Board of Trade (CBOT) is a commodity exchange established in 1848 where both agricultural and financial contracts are traded.

The Chicago Board of Trade (CBOT) is a commodity exchange established in 1848. The Chicago Mercantile Exchange Group is the world’s leading and most diverse derivatives marketplace, made up of four exchanges: the Chicago Mercantile Exchange (CME), the Chicago Board of Trade (CBOT), the New York Mercantile Exchange (NYMEX), and COMEX. Today, open-outcry trading is on the decline, and the Chicago Board of Trade has increasingly introduced electronic trading systems, maintaining very limited open-outcry trading pits. The Chicago Mercantile Exchange (CME) Group merged with the Chicago Board of Trade (CBOT) in 2007, adding interest rates, agricultural, and equity index products to the group's existing product offerings. The Chicago Board of Trade was originally solely an open-outcry trading platform, where human traders met to haggle and agree on a market price for a commodity.

Chicago Board of Trade (CBOT)

Certificated stock refers to commodity inventory that has been inspected and determined to be of basis grade for use in futures market trading.

Certificated stock generally refers to commodity inventory that has been inspected by qualified representatives and determined to be of basis grade for use in futures market trading. Certificated stock generally refers to commodity inventory that has been inspected by qualified representatives and determined to be of basis grade for use in futures market trading. Certificated stock less frequently refers to a stock for which a stock certificate has been issued. Certificated stock inventory is a key component of the commodity futures market. While certificated stock is generally a term used for commodity inventory, in some instances it may also refer to paper stock certificates.

Certificated Stock

Cheapest to deliver (CTD) in a futures contract is the cheapest security that can be delivered to the long position to satisfy the contract specifications.

The term cheapest to deliver (CTD) refers to the cheapest security delivered in a futures contract to a long position to satisfy the contract specifications. Determining the cheapest to deliver security is important for the short position because there is often a disparity between a security's market price and the conversion factor used to determine the value of the security being delivered. Since it is assumed that the short position provides the cheapest to deliver security, the market pricing of futures contracts is generally based on the cheapest to delivery security. Determining the cheapest to deliver security is important for the short position because there is a difference between a security's market price and the conversion factor used to determine its value. The term cheapest to deliver (CTD) refers to the cheapest security delivered in a futures contract to a long position to satisfy the contract specifications.

Cheapest to Deliver (CTD)

A clearing fee is a charge assessed by a clearing house for completing transactions using its own facilities.

A clearing fee is a charge assessed on securities transactions by a clearing house for completing transactions using its own facilities. In today's automated, high-speed trading world, the need for clearing is often taken for granted, but the existence of the clearing house and its role makes it possible for traders and investors to negate the worry that the party on the other side of their trade will somehow negate the effects of their trade by acting in bad faith. Transaction fees often include both a brokerage fee and a clearing fee, but seldom include a delivery fee, since the actual delivery of the underlying asset in a future contract is rare. A clearing fee is a charge assessed on securities transactions by a clearing house for completing transactions using its own facilities. To earn a clearing fee, a clearing house acts as a third-party to a trade.

Clearing Fee

A commodities exchange is a legal entity that determines and enforces rules and procedures for the trading commodities and related investments.

A commodities exchange is a legal entity that determines and enforces rules and procedures for trading standardized commodity contracts and related investment products. The commodities market is massive, trading more than trillions of dollars each day.
Traders rarely deliver any physical commodities through a commodities exchange. A year earlier, CME decided to shut down the commodity trading floor in Chicago, ending a 167-year-old tradition of face-to-face trading in favor of fully electronic trading. The trend is in the direction of electronic trading and away from traditional open outcry trading, where traders meet face-to-face and trade in what is known as a trading pit. A commodities exchange is a legal entity that determines and enforces rules and procedures for trading standardized commodity contracts and related investment products.

Commodities Exchange

A commodity market is a physical or virtual marketplace for buying, selling, and trading commodities. Discover how investors profit from the commodity market. 

Trade Routes Between Europe and Asia During Antiquity

Trade Between the Romans and the Empires of Asia

History of the CFTC: US Futures Trading and Regulation Before the Creation of the CFTC

Intercontinental Exchange and New York Board of Trade Complete Merger

NYMEX/COMEX Exchange Volume Report - Monthly

Products - Futures & Options: Energy, Biofuels

Products - Futures & Options: Agriculture

Big Banks Face Scrutiny Over Pricing of Metals

Table of Contents
What Is a Commodity Market? The major U.S. commodity exchanges are ICE Futures U.S. and the CME Group, which holds four major exchanges: the Chicago Board of Trade, the Chicago Mercantile Exchange, the New York Mercantile Exchange, and the Commodity Exchange, Inc.
1:23 Perhaps the most influential modern commodities market is the Chicago Board of Trade (CBOT), established in 1848, where it originally traded only agricultural commodities such as wheat, corn, and soybeans in order to help farmers and commodity consumers manage risks by removing price uncertainty from those agricultural products. Investors can gain exposure to commodities by investing in companies that have exposure to commodities or investing in commodities directly via futures contracts. Hard commodities include natural resources that must be mined or extracted—such as gold, rubber, and oil, whereas soft commodities are agricultural products or livestock—such as corn, wheat, coffee, sugar, soybeans, and pork.

Commodity Market

A commodity trader is an individual or business entity that focuses on investing in physical substances like oil, gold, grains, and other crops.

A commodity trader is an individual or business that focuses on investing in physical substances like oil, gold, or agricultural products. A commodity trader faces certain limitations compared to traders in other markets For example, commodity traders generate a total return solely from the price movement of the commodity they are trading. Unlike stock or bond traders, who can earn a dividend or interest payment from the asset they buy, commodity traders do not receive such periodic cash flows. These commodity traders do not really need the specific asset they are trading and rarely take delivery, but seek to gain exposure through forward and futures contracts. Commodity traders may work to secure a supply of raw material for a business or industry, to help to create liquidity in an international market, or to invest in a speculative capacity.

Commodity Trader

The commodity selection index (CSI) acts as a technical indicator and is a tool used to identify which commodities are best for short-term trading.

The commodity selection index (CSI) is a technical momentum indicator that attempts to identify which commodities are the most suitable for short-term trading. The commodity selection index (CSI) uses momentum and volatility to help identify securities for short-term trading opportunities. The commodity selection index (CSI) is a technical momentum indicator that attempts to identify which commodities are the most suitable for short-term trading. The commodity selection index (CSI) is a tool mostly used for short-term trading. Because short-term trading carries both high risk and high reward, traders must understand each trade to be successful.

Commodity Selection Index (CSI)

Contango is a situation in which the futures price of a commodity is above the spot price.

Table of Contents
Expand Specifically, if a commodity ETF invests in commodity futures contracts as opposed to physically holding the commodity in question, that ETF may be forced to continuously replace—or “roll over”—its futures contracts as its older contracts expire. When the market is in backwardation, the futures prices for the commodity follow a downward-sloping curve in which futures prices are below spot prices. Investors who buy commodity contracts when markets are in contango tend to lose some money when the futures contracts expire higher than the spot price. In all futures market scenarios, the futures prices will usually converge toward the spot prices as the contracts approach expiration.

Contango

A contract for differences (CFD) is a marginable financial derivative that can be used to speculate on very short-term price movements for a variety of underlying instruments.

A contract for differences (CFD) is an arrangement made in financial derivatives trading where the differences in the settlement between the open and closing trade prices are cash-settled. Since CFDs trade using leverage, investors holding a losing position can get a margin call from their broker, which requires additional funds to be deposited to balance out the losing position. Pros
CFDs allow investors to trade the price movement of assets including ETFs, stock indices, and commodity futures. CFDs are traded on margin meaning the broker allows investors to borrow money to increase leverage or the size of the position to amply gains. The CFD is a tradable contract between a client and the broker, who are exchanging the difference in the initial price of the trade and its value when the trade is unwound or reversed.

Contract for Differences (CFD)

Contract size is the deliverable quantity of commodities or financial instruments that underlie futures and options contracts traded on an exchange.

Contract size refers to the deliverable quantity of a stock, commodity, or other financial instruments that underlie a futures or options contract. For example, the contract size for a Canadian dollar futures contract is C$100,000, the size of a soybean contract traded on the Chicago Board of Trade is 5,000 bushels, and the size of a gold futures contract on the COMEX is 100 ounces. E-minis are predominantly traded on the Chicago Mercantile Exchange (CME) and are available on a wide range of indexes, such as the Nasdaq 100, S&P 500, S&P MidCap 400, and Russell 2000, commodities, such as gold, and currencies, such as the euro.
The E-mini S&P 500, for example, is an electronically traded futures contract on the CME that has a contract size one-fifth that of the standard S&P 500 futures contract. E-minis are a class of electronically traded futures contracts that have a contract size that is a fraction of the corresponding standard futures contract. Contract sizes vary by asset type and exchange; for instance, U.S. listed equity options have a contract size of 100 shares per contract.

Contract Size

Convergence is the movement of the price of a futures contract toward the spot price of the underlying cash commodity as the delivery date approaches.

Convergence is the movement of the price of a futures contract toward the spot price of the underlying cash commodity as the delivery date approaches. As the delivery date approaches, the futures contract will depreciate in price (or the underlying commodity must increase in price), and in theory, the two prices will be equal on the delivery date. If there are significant differences between the price of the futures contract and the underlying commodity price on the last day of delivery, the price difference creates a risk-free arbitrage opportunity. If a futures contract's delivery date is several months or years in the future, the contract will often trade at a premium to the expected spot price of the underlying commodity on the delivery date. Convergence simply means that, on the last day that a futures contract can be delivered to fulfill the terms of the contract, the price of the futures and the price of the underlying commodity will be equal.

Convergence

Cost of tender is the total charges associated with the delivery and certification of commodities underlying a futures contract.

Cost of tender is the total charges associated with the delivery and certification of commodities underlying a futures contract. For example, if an investor is long corn (owns a futures contract on corn), the seller must deliver the corn to the contract holder when the contract expires (unless the contract holder closes the position prior to expiration). Cost of tender refers to the sum of costs related to the storage and physical delivery of commodities obligated under a derivatives contract. Cost of tender is the total charges associated with the delivery and certification of commodities underlying a futures contract. The cost of tender represents the total costs related to taking the physical delivery of a commodity.

Cost of Tender

Customer type indicator (CTI) codes assist in identifying futures exchange transactions made by brokers for different clients or for themselves.

Harmonization of Customer Type Indicators

Customer type indicator codes (CTI codes) are part of a system that identifies futures exchange transactions made by brokers for different clients or for themselves. **CTI 2**: Transactions executed for the proprietary account of a clearing member or non-clearing member firm.
**CTI 3**: Transactions where an individual member or authorized trader executes for the personal account of another individual member, for an account the other individual member controls, or for an account in which the other individual member has ownership or financial interest.
**CTI 4**: Any transaction not meeting the definition of CTI 1, 2, or 3. Here are the four coded categories, as defined on the National Futures Association (NFA):
**CTI 1**: Transactions initiated and executed by an individual member for their own account, for an account they control, or for an account in which they have ownership or financial interest. Customer type indicator codes (CTI codes) are part of a system that identifies futures exchange transactions made by brokers for different clients or for themselves. Customer Type Indicator Codes (CTI codes) identify what type of customer is involved in a futures contract transaction.

Customer Type Indicator (CTI) Codes

A daily trading limit is the maximum amount, up or down, that a exchange traded security is allowed to fluctuate in one trading session.

CFTC Approves Price Limit Increase for Wheat Futures Contracts

One Currency, Two Markets: The Renminbi’s Growing Influence in Asia-Pacific

A daily trading limit is the maximum price range limit that an exchange-traded security is allowed to fluctuate in one trading session. Once a price limit has been reached, trading can still continue at that limit but the price will not cross the price set for the daily trading limit. A daily trading limit is the maximum price range limit that an exchange-traded security is allowed to fluctuate in one trading session. A daily trading limit is the maximum amount, up or down, that an exchange-traded security's price is allowed to move over the course of a single trading session. Daily trading limits are price ranges established to curtail excessive volatility that can be detrimental to the orderly functioning of markets, especially in highly volatile derivatives markets.

Daily Trading Limit

In the commodities futures market, the deferred month futures contract is the contract whose expiration date is farthest in the future.

In the commodities futures market, the deferred month futures contract is the contract whose expiration date is farthest in the future. In the commodities futures market, the deferred month futures contract is the contract whose expiration date is farthest in the future. In doing so, the purchase of the deferred month futures contracts acts as a hedge, reducing the investor’s potential losses if their prediction of falling oil prices fails to materialize. This would involve selling oil in the nearby months’ futures contracts while simultaneously buying oil in the deferred months’ contracts. If the purchasers need commodities within a short timeframe, they can purchase front month futures contracts which expire in or near the present month.

Deferred Month

The term “delivery” refers to the act of a commodity, currency, security, cash or another instrument that is the subject of a contract.

In the financial markets, the term “delivery” refers to the act of transferring a commodity, currency, security, cash or another instrument that is the subject of a contract. In some cases, the buyer of a contract may receive physical delivery of the underlying commodity, such as barrels of oil in the case of a crude oil futures contract. Instead, they will simply hope to profit from a rise in the price of the underlying commodity, and will look to settle their contract in cash by selling their contract to a third party before it expires. In the case of a stock options contract, on the other hand, it is more common for holders to settle their contracts in cash rather than delivering the specific shares of stock that were the underlying asset for the option. To help avoid being surprised by a sudden jump in the price of corn, ABC Foods decides to purchase one year’s supply of corn ahead of time, by using the commodity futures markets.

Delivery

A delivery date is the final date by which the underlying commodity for a futures contract must be delivered for the terms of the contract to be fulfilled.

A delivery date is the final date by which the underlying commodity for a futures or forward contract must be delivered for the terms of the contract to be fulfilled. All futures and forward contracts have a delivery date upon which the underlying commodity must be transferred to the contract holder if they hold the contract until maturity instead of offsetting it with an opposing contract. The main delivery months for some commodities, like corn futures, are March, May, July, September, and December.﻿﻿﻿ These contracts are coded by the exchange such that the last two symbols denote the month and year of the delivery date. A delivery date is the final date by which the underlying commodity for a futures or forward contract must be delivered for the terms of the contract to be fulfilled. Most futures contracts are used as a hedge to reduce the risk of adverse price movements in a commodity and are closed out with an offsetting position (selling to offset a long position and buying to offset a short position) before the actual delivery date.

Delivery Date

A delivery month is the month stipulated for delivery of the underlying commodity in a futures contract.

For instance, cocoa will only have delivery months occurring in March, May, July, September, or December.﻿﻿ This means if you do not exit your position by the end of the month before the contract's expiration, you must take physical delivery of the cocoa—or the commodity in question. The exchange on which the futures contract is traded also establishes a delivery location and the date within the delivery month when the delivery can take place. The delivery month is simply the month stipulated in a futures contract for cash settlement or for physical delivery. The term delivery month refers to a key characteristic of a futures contract that designates when the contract expires, and when the underlying asset must be delivered or settled.

Delivery Month

A differential is the value adjustment of the delivery location and grade of deliverables that a futures contract permits.

A differential is the degree of adjustment to the value or grade of physical deliverables, or to their location, as permitted by a futures contract. In most cases, futures markets are utilized to diminish exposure to price risk because they represent supply and demand for a typical grade of available and deliverable commodities. Historically speaking, the cash price and the futures price of a commodity generally move closer to one another as the futures delivery date approaches. A price differential is not always due to a commodity’s grade and quality but may also be reflective of local physical market conditions. A futures contract sets out standardized terms for the underlying asset, where differentials include any modifications to the contract terms.

Differential

A dry bulk commodity is a raw material that is shipped in large, unpackaged parcels like coal, iron ore, and grain.

A dry bulk commodity is a raw material that is shipped in large unpackaged parcels. The commodities, which can include grain, metal, and energy materials, are transported long distances in bulk by sea in large cargo vessels by companies that specialize in dry bulk delivery. Grain is another major cargo in terms of seaborne dry bulk trade and accounts for a chunk of the total dry bulk trade worldwide. The Baltic Dry Index (BDI) is probably the most common index used to measure changes in the cost to transport various dry bulk commodities around the world. In other words, changes in the index reflect true supply and demand for dry bulk commodities from producers and not the day-to-day buying and selling on the part of speculators.

Dry Bulk Commodity

An eligible contract participant (ECP) is a group or individual allowed to engage in financial transactions not open to retail customers.

An eligible contract participant (ECP) is an entity or individual allowed to engage in certain financial transactions that are not open to the average investor. Financial institutions, insurance companies, broker-dealers, and investors with more than $10 million in assets can become ECPs
The requirements are fewer if the main activity of the ECP is hedging: $5 million in assets if hedging investment risk and $1 million if hedging commercial risk An eligible contract participant (ECP) is an entity or individual allowed to engage in certain financial transactions that are not open to the average investor. An eligible contract participant, on the other hand, is allowed to engage in the derivatives market for different purposes, including to hedge or manage risk. While the minimum for individuals, partnerships, and corporations to become an ECP is $10 million in assets, that figure drops to $5 million if the ECP contract is being used to hedge risk.

Eligible Contract Participant

An E-mini S&P 500 is an electronically traded futures contract that is a fraction of the value of a standard futures contract. Read about E-mini investing here.

Micro E-mini S&P 500 Index Futures - Contract Specs

Table of Contents
What Is an E-Mini? A position with five E-mini S&P 500 futures contracts—that each trade at one-fifth the size of the full-sized contract—has the same monetary value as one full-sized contract in the same contract month.
The contract size is the value of the contract based on the price of the futures contract times a contract-specific multiplier. IRS Form 6781 stipulates that any futures contract traded on a U.S. exchange, foreign currency contract, dealer equities option, dealer securities futures contract, or non-equity options contract are taxed at 60% of the long-term capital gains rates and short-term capital gains tax rates at 40%—regardless of how long the trade was opened for.
Because E-minis offer round-the-clock trading, low margin rates, volatility, liquidity, and greater affordability, they are ideal trading instruments for active traders. E-mini S&P 500 FAQs
An E-mini is an electronically traded futures contract that is a fraction of the value of a corresponding standard futures contract. Understanding E-Minis
E-mini S&P 500 Specifications
E-minis Pros and Cons
E-minis vs. Full-Sized Futures

E-Mini

An exchange-traded commodity (ETC) gives traders and investors exposure to commodities in the form of shares.

An exchange-traded commodity (ETC) is a type of security that can offer traders and investors without direct access to spot or derivatives commodities markets exposure to commodities such as metals, energy, and livestock. An exchange-traded commodity (ETC) is a type of security that can offer traders and investors without direct access to spot or derivatives commodities markets exposure to commodities such as metals, energy, and livestock. An ETC can invest in either one commodity or in a commodity basket, and its performance can be based on the spot price of the commodity or else tied to futures contracts. Like ETFs, ETC shares are listed and traded on exchanges, with prices fluctuating based on price changes of the ETC's underlying commodities. An ETC can track individual commodities or a basket of several commodities and can provide an interesting alternative to trading commodities in the futures market.

Exchange-Traded Commodity (ETC)

The Futures Industry Association (FIA) is a global group of futures professionals. It educates and lobbies on issues relating to markets and trading.

The Futures Industry Association (FIA) is an international association of futures commission merchants, brokers, banks, and trading advisers operating in the United States, European, and Asian futures markets. The Futures Industry Association (FIA) is an international association of futures commission merchants, brokers, banks, and trading advisers operating in the United States, European, and Asian futures markets. With offices located in global financial centers, FIA's membership includes clearing firms, exchanges, clearinghouses, trading firms, and commodities specialists from 50 countries; as well as technology vendors, law firms, and other professional service providers. The Futures Industry Association (FIA) is a global industry organization for the futures, options, and listed derivatives markets. FIA currently represents futures clearing and trading firms, commodities specialists, vendors, and other industry-related professionals in some 50 nations with more than 350 companies.

Futures Industry Association (FIA)

A First Notice Day is the date on which the owner of an expired futures contract can take physical delivery of its underlying commodity.

The Treasury Futures Delivery Process, 7th Edition

A First Notice Day (FND) is the day after which an investor who has purchased a futures contract may be required to take physical delivery of the contract's underlying commodity. In addition to the First Notice Day (FND), the two other key dates in a futures contract are last notice day, the last day the seller can deliver commodities to the buyer, and last trading day, the day after which commodities must be delivered for any futures contracts that remain open.﻿﻿ A hedger who is a producer can sell futures contracts to lock in a price for their output. First notice day (FND) is a date specified in a futures contract after which time the owner of the contract can take physical delivery of the underlying asset. A First Notice Day (FND) is the day after which an investor who has purchased a futures contract may be required to take physical delivery of the contract's underlying commodity. A delivery notice is a notice written by the holder of the short position in a futures contract informing the clearinghouse of the intent and details of delivering a commodity for settlement.

First Notice Day

A floor trader is an exchange member who executes transactions from the floor of the exchange, exclusively for their own account.

A floor trader is an exchange member who executes transactions from the floor of the exchange, exclusively for their own account. In reality, most traders are not floor traders, and floor traders are increasingly rare, primarily because most traders who use their own money have switched to electronic trading, which is not conducted in the pit. Floor traders used to use the open outcry method in the pit of a commodity or stock exchange, but now most of them use electronic trading systems and do not appear in the pit. Floor trading has become increasingly rare as electronic trading has become faster and cheaper, with many exchanges closing their trading floors altogether. Floor trading has become increasingly rare as electronic trading has become faster and cheaper, with many exchanges closing their trading floors altogether.

What Is a Floor Trader?

A forward commitment is an agreement between two parties to carry out a transaction in the future. 

A forward commitment is a contractual agreement to carry out a transaction in the future. While a forward commitment contains an obligation to carry out the transaction as planned, a contingent claim contains the right to carry out the transaction but not the obligation. A futures contract with a forward commitment allows the producer to find a buyer in advance, locking in the sale price for the producer and the buyer over that same time period. Forward commitments are closely associated with commodities due to their heavy use in futures markets, but the term generally applies to any arrangement in which two parties agree to the terms of a future transaction well in advance of it occurring. Forward commitments are contained within several types of derivatives, including forward contracts, futures contracts, and swaps.

Forward Commitment

A futures contract is a standardized agreement to buy or sell the underlying commodity or other asset at a specific price at a future date.

Table of Contents
What Is a Futures Contract?
Understanding Futures Contracts This way they know in advance the price they will pay for oil (the futures contract price) and they know they will be taking delivery of the oil once the contract expires. The buyer of a futures contract is taking on the obligation to buy and receive the underlying asset when the futures contract expires. A futures contract gets its name from the fact that the buyer and seller of the contract are agreeing to a price today for some asset or security that is to be delivered in the future. Producers or purchasers of an underlying asset hedge or guarantee the price at which the commodity is sold or purchased, while portfolio managers and traders may also make a bet on the price movements of an underlying asset using futures.

Futures Contract

A futures market is an exchange for trading futures contracts. Futures, unlike forwards, are listed on exchanges.

A futures market is an auction market in which participants buy and sell commodity and futures contracts for delivery on a specified future date. Examples of futures markets are the New York Mercantile Exchange (NYMEX), the Kansas City Board of Trade, the Chicago Mercantile Exchange (CME), the Chicago Board of Trade (CBoT), Chicago Board Options Exchange (CBOE) and the Minneapolis Grain Exchange. In the U.S. futures markets are largely regulated by the commodities futures clearing commission (CFTC), with futures contracts standardized by exchanges. Most all futures markets are registered with the Commodity Futures Trading Commission (CFTC), the main U.S. body in charge of regulation of futures markets. In order to understand fully what a futures market is, it’s important to understand the basics of futures contracts, the assets traded in these markets.

Futures Market

Hundredweight or CWT is a standard of measurement used in trading commodities contracts and in the shipping industry. Learn how to calculate CWT.

LTL vs. CWT: Small Parcel Shipping or LTL Freight Shipping for Optimized Supply Chain Management

LTL vs. Parcel Hundredweight: Which Service Is Right for You

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What Is a Hundredweight (CWT)? This was set in law in 1835 when the Weights and Measures Act established one hundredweight as 112 pounds,
In the U.S. and Canada, one hundredweight, then and now, is 100 pounds.
In 1824, it became illegal for British merchants to use the term hundredweight to refer to a unit of 100 pounds, and merchants could be sued for fraudulent activity for doing so. In North America, a hundredweight is equal to 100 pounds; in the United Kingdom, a hundredweight is 112 pounds. Understanding Hundredweight
Examples of Hundredweight
Special Considerations
CWT Shipping vs. LTL Shipping
The Bottom Line
A hundredweight (CWT) is a unit of measurement used to define the quantities of certain commodities being bought and sold. One problem with using the hundredweight for global trade is that it has two standard definitions: It's 100 pounds in the U.S. and Canada and 112 pounds in the U.K.

Hundredweight (CWT)

Index arbitrage is a trading strategy that attempts to profit from the differences between actual and theoretical prices of a stock market index.

Index arbitrage is a trading strategy that attempts to profit from the price differences between two or more market indexes. Index arbitrage is a trading strategy attempts to profit from differences between one or more versions of an index, or between an index and its components. For example, the formula for the fair value on the S&P futures contract is:
> (Fair value = cash \{1+r(x/360)} – dividends)
Cash is the current S&P cash value. One of the more well-known examples of this trading strategy includes attempting to capture the difference between where the S&P 500 futures are trading and the published prices of the S&P 500 Index itself. It can also be arbitrage between the instruments that track the index (e.g. index ETFs or options), and the components that make up the index.

Index Arbitrage

Initial margin refers to the percentage of a security's price that an account holder must purchase with available cash or other securities in a margin account.

Investor Bulletin: Understanding Margin Accounts

Initial margin is the percentage of the purchase price of a security that must be covered by cash or collateral when using a margin account. To open a margin account at a brokerage firm, an account holder first needs to post a certain amount of cash, securities or other collateral, known as the initial margin requirement. In the extreme event that securities purchased in a margin account decline to zero value, the account holder needs to deposit the full initial value of the securities in cash or other liquid collateral to cover the loss. However, if the account holder opens a margin account and deposits the 50% initial margin requirement, or $100,000, the total purchasing power will rise to $200,000. During periods of high market volatility, futures exchanges may increase initial margin requirements to any level they deem appropriate, matching the power of equity brokerage firms to increase initial margin levels above those required by Fed regulation.

Initial Margin

The Intercontinental Exchange is a market-based in Atlanta, Georgia that facilitates the electronic exchange of energy commodities.

The Intercontinental Exchange (ICE) is an American company that owns and operates financial and commodity marketplaces and exchanges. ICE also operates six central clearing houses: ICE Clear U.S., ICE Clear Europe, ICE Clear Singapore, ICE Clear Credit, ICE Clear Netherlands, and ICE NGX. Since its founding in 2010, some of the company's major acquisitions include the International Petroleum Exchange (IPE), now ICE Futures Europe, in 2001; the New York Board of Trade (NYBOT) in 2005, Winnipeg Commodity Exchange, now ICE Futures Canada, in 2007; the Creditex Group in 2008; European Climate Exchange (ECX) in 2010, NYSE Euronext in 2013; Interactive Data Corporation (IDC) in 2015, Standard & Poor's Securities Evaluations, Inc. in 2016; Virtu BondPoint in 2017; and the Chicago Stock Exchange (CHX) in 2018. The proprietary real-time data, valuations, analytics, reference data, evaluated pricing, and connectivity solutions employed by ICE Data Services is used by NYSE, SuperDerivatives, Interactive Data (IDC), and other ICE customers, including financial institutions, asset managers, and individual investors. Its cash exchanges include the New York Stock Exchange (NYSE), NYSE ARCA, NYSE National, NYSE AMEX Options, NYSE ARCA Options, and NYSE Chicago.

Intercontinental Exchange (ICE)

An intermarket spread involves purchasing long futures in one market and selling short futures of a related commodity with the same expiration.

An intermarket spread is an arbitrage strategy for trading various correlated instruments in the commodity futures market. A trader who executes an intra-market spread trades calendar spreads and is in long and short futures in the same underlying commodity.
The intermarket spread strategy uses one exchange platform to complete the spread. Selling the crack spread means you expect that the demand for refined products is weakening or the spread itself is tightening due to changes in oil pricing, so you sell the refined product futures and buy crude futures. Using this method, a trader places orders for the simultaneous purchase of a commodity futures contract with a given expiration month and also sells the same expiration month of a futures contract in a closely related commodity (e.g., purchase crude oil futures to sell gasoline futures). The crack spread, used in the oil futures markets, is a common intermarket spread strategy between crude oil and its refined products.

Intermarket Spread

An introducing broker (IB) advises clients in the futures market but delegates trade execution and back office operations to others.

An introducing broker (IB) is a broker in the futures markets who has a direct relationship with a client, but delegates the work of the floor operation and trade execution to another futures merchant, typically a futures commission merchant (FCM). are registered with the Securities and Exchange Commission (SEC) and are regulated by the Financial Industry Regulatory Authority (FINRA).﻿﻿ Futures introducing brokers are registered with the Commodity Futures Trading Commission (CFTC) and regulated by the National Futures Association (NFA).
Introducing brokers help increase efficiency and lower the work load for futures commission merchants. Most IBs do not have the financial resources to execute trades for their clients directly because that requires a direct relationship with futures exchanges and the large overhead of maintaining accounts, trades, and reporting, as well as developing and maintaining trading platforms. An introducing broker (IB) advises clients in the futures market but delegates trade execution and back office operations to others.

Introducing Broker (IB)

An inverted market occurs when the near-maturity futures contracts are higher in price than far-maturity futures contracts of the same type.

Table of Contents
What Is an Inverted Market? The terms contango and backwardation refer to how a futures contract moves (rising or falling) toward the spot price as the contract moves toward expiration.
An inverted market may arise for multiple reasons, including a short-term supply decrease, which causes prices to be higher in the short term. An inverted market sees futures prices that are lower over time, while a normal market sees futures prices that are higher over time. In the context of futures markets, an inverted market occurs when the spot price and near-maturity contracts are higher in price than far-maturity contracts. An inverted market is one where the spot price and near-term maturity futures contracts are priced higher than more-distant maturity contracts.

Inverted Market

In finance, “job lot” refers to a commodities futures contract whose denomination is smaller than the typical standard lot for that commodity.

In finance, the term “job lot” refers to a commodities futures contract whose denomination is smaller than the typical standard lot for that commodity. A futures contract is considered a job lot when the agreement between the buyer and seller for the delivery of a commodity has a quantity below the normal limits for a commodity futures contract. In finance, the term “job lot” refers to a commodities futures contract whose denomination is smaller than the typical standard lot for that commodity. If the exchange agreed to enter into a commodity futures contract with a buyer below the 5-ounce minimum, it would be considered a job lot. In the commodities futures market, job lets help smaller buyers participate in the market, increasing liquidity for all market participants.

Job Lot

LIFFE is a London, England-based futures and options exchange now known as ICE Futures Europe.

What is the London International Financial Futures and Options Exchange (LIFFE)?

IntercontinentalExchange Completes Acquisition of NYSE Euronext

The London International Financial Futures and Options Exchange (LIFFE) is the former name of the largest futures and options exchange in London, England. Its peer subsidiaries under the ICE brand include ICE Futures U.S., ICE Futures Canada, and ICE Futures Singapore. Products transacting on the ICE Futures Europe exchange include agriculture futures, energy futures, interest rate futures, and options, and all types of equity derivatives. The London International Financial Futures and Options Exchange (LIFFE) is the former name of the largest futures and options exchange in London, England. The London International Financial Futures and Options Exchange (LIFFE) is the former name of the largest futures and options exchange in London, England.

London International Financial Futures and Options Exchange (LIFFE)

A limit move is the price of a contract that triggers a halt in trading, either up or down, set by a particular exchange.

A limit move acts as a market circuit breaker and is the maximum amount of change that the price of a commodity futures contract is allowed to undergo in a single day. Limit moves which affect a commodity's futures contract are:
The lock limit which happens when the contract price of a commodity instrument moves beyond an allowable limit, stopping trading for the day.
A limit up is the maximum amount the price of a commodity futures contract may advance in one trading day.
Conversely, the limit down is the most the price may decline in one trading day.
For example, assume that a lumber futures contract is selling for $3.50, and has a previous day's close of $4. There are many other limit moves that apply to futures commodity contracts, such as a position limit, exercise limit, daily trading limit, lock limit, limit up, and limit down. Once the commodity begins closing at a rate that is neither the limit high nor the limit low, then the price will return to its original initial limit. The amount the limit move is set at is based on the previous day's closing price and is not allowed to go above or drop below once the limit is reached.

Limit Move

In finance, the term “limit up” refers to the maximum amount a price is permitted to increase during one trading day.

Limit up is the maximum amount a price is permitted to increase during one trading day. The limit up price is the maximum price a commodity futures contract is allowed to rise within one trading session. If a price rises above its limit up level, the exchange can either halt trading in that security or choose to raise the limit up and permit further trading. Importantly, the use of limit up prices does not prevent traders from entering orders to trade futures at levels above the limit price. The exchange will monitor trading of all futures contracts and automatically halt trading in a contract if its limit up price is reached.

Limit Up

A long hedge is a situation wherein an investor has to take a long position in futures contracts in order to hedge against future price volatility.

A long hedge refers to a futures position that is entered into for the purpose of price stability on a purchase. For this reason, a long hedge may also be referred to as an input hedge, a buyers hedge, a buy hedge, a purchasers hedge, or a purchasing hedge. If the May spot price of copper is below $2.40 per pound, the manufacturer takes a small loss on the futures position while saving overall, thanks to a lower-than-anticipated purchasing price. A long hedge represents a smart cost control strategy for a company that knows it needs to purchase a commodity in the future and wants to lock in the purchase price. The opposite of a long hedge is a short hedge, which protects the seller of a commodity or asset by locking in the sale price.

Long Hedge

A look-alike contracts is a derivative of a futures contract. 

CME takes aim at ‘parasitic’ derivatives

Look-alike contracts are a cash-settled financial product based on the settlement price of a similar exchange-traded, physically settled futures contract. Traders of look-alike contracts do argue that last point, as they are market participants so the volume and open interest of their speculation gives market information on their opinions on the price performance of the underlying futures contract. Former CME Group CEO, Craig Donohue called look-alike contracts “parasitic, second-order” derivatives in 2011.﻿﻿ At the time, of course, ICE was aggressively creating look-alike contracts using CME-traded futures as a benchmark. The contract terms of a look-alike contract closely correspond with the contract terms of the futures contract. A look-alike contract is an OTC derivatives contract that is cash-settled that has otherwise similar specifications to a physically settled futures contract.

Look-Alike Contracts

A narrow basis refers to the convergence of the local cash price and the futures contract commodity price and implies an efficient and liquid market.

In the commodities futures markets, the term “narrow basis” refers to a situation in which the current cash (spot) price of a commodity is quite close to its futures price. In general, the basis for a commodity futures contract is therefore simply its local cash price (i.e., the spot price of the underlying asset) minus its futures contract price. In the commodities futures markets, the term “narrow basis” refers to a situation in which the current cash (spot) price of a commodity is quite close to its futures price. A narrow basis is a market condition in which the gap between local cash prices and futures prices is relatively small. If, on the other hand, investors are expecting a large change in the future demand or supply of the commodity, this could cause the futures price to jump or fall, leading to a wide basis.

Narrow Basis

Natural capital is a reference to the inventory of natural resources held by companies, such as natural gas or oil.

26 USC Subtitle A, CHAPTER 1, Subchapter I: Natural Resources

Natural capital is a reference to the inventory of natural resources held by companies, such as water, gold, natural gas, silver, or oil. Like all commodity resources, these natural capital commodities must be certificated in order for the company to write a derivative on the natural capital for sale in the futures market. A producer can write contracts to sell its natural capital on a futures exchange once the natural capital is certificated. Natural capital must also be managed on a company’s financial statements which requires natural capital accounting. Natural capital is a type of commodity capital that includes natural resources mined, stored, or produced by a company.

Natural Capital

Natural gas liquids are components of natural gas that are separated from the gas state in the form of liquids. 

Natural gas liquids (NGL) are components of natural gas that are separated from the gas state in the form of liquids. Natural gas liquids are classified based on their vapor pressure:
Low = condensate
Intermediate = natural gas
High = liquefied petroleum gas
Additionally, chemical compositions of NGLs are similar, but their applications vary widely. Natural gas liquids (NGL) are components of natural gas that are separated from the gas state in the form of liquids. Natural gas liquids are components of natural gas that are separated from the gas state in the form of liquids. A challenge with natural gas liquids is that they're expensive to handle, store, and transport compared to refined products because NGLs require high pressure or low temperature to be maintained in their liquid state for shipment and handling.

Natural Gas Liquids – NGL

The New York Futures Exchange (NYFE) was a subsidiary of the New York Stock Exchange (NYSE) focused on the trading of futures and options contracts.

Largest Derivatives Exchanges Worldwide 2019, By Number of Contracts Traded

NYSE-owner ICE to form new company for digital assets

The New York Futures Exchange (NYFE) was a subsidiary of the New York Stock Exchange (NYSE) focused on the trading of futures and options contracts, mainly pertaining to NYSE stock index futures. The New York Futures Exchange (NYFE) was a subsidiary of the New York Stock Exchange (NYSE) focused on the trading of futures and options contracts, mainly pertaining to NYSE stock index futures. The exchange focused mainly on stock index futures linked to the New York Stock Exchange (NYSE), as NYFE at that time was a subsidiary of the NYSE. Founded in 1980, the NYFE has since undergone several mergers and acquisitions, including a combination with several other commodities exchanges in 2004 to create the New York Board of Trade (NYBOT).﻿﻿ Most recently, in 2007 the NYBOT and all of its subsidiaries were acquired by the Intercontinental Exchange (ICE), today, known as the ICE Futures exchange. Today, the legacy of the NYFE continues through the ICE, an American holding company that owns a portfolio of financial marketplaces including the NYSE and several clearinghouses that help ensure the smooth functioning of the modern financial system.

New York Futures Exchange (NYFE)

An omnibus account allows for managed trades of more than one person, and allows for anonymity of the persons in the account.

An omnibus account allows for managed trades of more than one person, and allows for anonymity of the persons in the account. The broker managing the omnibus account typically has the ability to execute trades on behalf of investors with funds inside the omnibus account. An omnibus account can provide investors with access to foreign markets while maintaining a level of anonymity, although, omnibus accounts are not allowed in parts of the world. An omnibus account allows for managed trades of more than one person, and allows for anonymity of the persons in the account. An omnibus account allows for managed trades of more than one person, and allows for anonymity of the persons in the account.

Omnibus Account

A formerly popular method of trading at stock or futures exchanges involving hand signals and verbal bids and offers to convey trading information.

Open outcry was a popular method for communicating trade orders in trading pits before 2010. Successful traders in open outcry relied on temporary information asymmetry in order to be successful, but more information parity helps retail and institutional traders alike to profit from greater trading efficiency and increased participation. The length of the trading day differs between open outcry exchanges and those that use electronic trading such as the Globex. Because trading can occur between any two participants at any given time, it differs from over-the-counter trading where trading is negotiated between two parties privately. While open outcry dates back centuries as the dominant method for trading, most exchanges now use electronic trading systems.

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