Bid

Current buying price.

Bid-offer Spread

Market Makers quote futures prices in terms of a bid-offer price. The bid price is the price at which they will buy a commodity future contract and the offer price is the price which they will sell at. So, a bid-offer spread of $102-$104 means the market maker will buy at $102 and sell at $104.

Cash Settlement

Cash Settlement is when the futures contract is settled for cash rather than delivering the physical commodity to the buyer.

Clearing

The process by which futures contracts are settled and the counterparty risk of buyers and sellers is managed. This process takes place through the payment of a deposit known as an initial margin upon opening a futures contract.

Clearing Fee

The charge raised by the clearing house for clearing/settlement of completed trades.

Clearing House

A regulated organisation that handles the clearing and settlement of futures and options contracts by acting as an intermediary of all contracts and becoming the seller to every buyer and the buyer to every seller.

Clearing Member

An exchange member who is also a member of the clearing house.

Closing a Futures Position

To exit a futures trade by buying or selling the futures contract. To cancel the delivery obligation by taking an opposite and equal futures transaction. For example a seller of a futures contract, such as a producer, can close the futures they have sold – their short futures position - by buying futures contracts of the same quantity and delivery month.

Contract Size

The quantity of the product for each contract bought or sold.

Daily Settlement Price

The DSP is the end of day price published by the exchange and the price at which the futures contract is settled - either in cash or physical delivery of the commodity.

Delivery

The act of providing the underlying physical product to the buyer or receiving the underlying physical product from the seller in accordance with the contract specifications.

Delivery Months

A futures contract has months when delivery occurs. Delivery months are those which are listed for trading and the months in which delivery takes place.

Differential

The difference in price between the physical product being hedged and the price of the underlying product represented by the futures contract.

Exchange

For the purpose of the guide, this is a regulated centralised derivatives market, such as DGCX.

Exchange Member

A company who is permitted by the exchange to buy and sell futures and options contracts directly on its trading system.

Exchange Trading Fee

The charge raised by the exchange for buying and selling futures and options contracts.

Futures Contract

An agreement to deliver or take delivery of a given quantity and quality of an underlying asset during a specified delivery month, at a price determined at the initiation of the contract.

Gearing

Futures contracts are geared because only a small initial amount is paid in order to open and trade a position in the futures market. So a high exposure is gained with a smaller initial outtay. This is also referred to as leverage.

Hedging

Where a physical market player uses a futures contract to protect against adverse movements in the price of the particular commodity.

Initial Margin

The deposit that has to be provided to the clearing house when a contract is bought or sold. The initial margin is set by the clearing house.

Last Trading Day

The last day in which trading is permitted for a specific delivery month.

Limit Order

A limit order is where the buyer/seller of a commodity futures contract has specified a time frame or price parameter within which the trade must be completed. The exchange member must execute the trade within the time and price specifications of the client.

Liquidity

Liquidity refers to how actively traded a certain contract or market is i.e. how many buy/sell prices are seen on-screen and how easy and quick it is to close your trade by buying or selling at a certain price.

Long

When futures have been bought, you are said to be long. So if a Jeweller buys 100 futures contracts he is long 100 futures contracts.

Market Maker

A market maker is a dealer/trader who commits to posting continuous (for a certain % of the trading day) buy and sell prices to help create a liquid market.

Maximum Order Size

The maximum number of contracts which can be traded at one time.

Minimum Price Movement (tick size)

The tick size is the minimum price movement (in US$) allowed for the contract. So a “tick “represents the smallest amount that a price can change.

New Contract Listing

The day on which a new contract (delivery month) is listed.

Offer

Current selling price.

Open Interest/Open Position

The number of short or long futures contracts that remain open in the market and which are yet to be closed out or offset.

Order

An instruction from the client to the exchange member to buy or sell futures contracts at a specific value (best price) and time.

Pairs Trading / Spread Trading

Pairs and spread trading are two terms used to describe the same trading technique. It is when a trader takes two positions in the futures market: one long and one short but on two different instruments. The risk and return on spread trading is therefore not directional; if both prices rise or fall, it is still possible to make a profit on the difference between the two trades. However; no profit is made if both prices rise or both fall by the same percentage. However, this is unlikely.

Price Quote

The currency and quantity in which each contract is quoted.

Quality Specification

The required quality and standard of the underlying physical product

Short

When futures have been sold, you are said to be short. So if a producer sells 100 futures contract he is said to be short 100 futures.

Speculation/Investing

This occurs when a party sells or buys a futures or options contract, and either does not have any connection with the underlying physical product or is involved in the physical product but has bought futures contracts on physical products he does not own, or bought futures contracts for products he does not need.

Spot Price

The immediate price of a certain asset. For example, the price at which you can buy gold now.

Stop-Loss

An automatic exit (sell) price for a futures contract set by the trader/client in order to establish a maximum loss and point at which to close the trading position.

Symbol

Each contract is given a trading symbol e.g. DG in the case of the DGCX gold futures contract.

Technical Analysis

Technical analysis is a financial market analysis discipline for forecasting the future direction of prices by studying historical market data, prices and volumes. Technical analysis does not consider external factors such as the nature of the market, economy or commodity and focuses purely on “charts“.

Trading Days and Hours

The days and hours for which you can trade the contract on a business day.

Underlying

Underlying is a term often used to refer to the underlying product (e.g. a commodity, currency etc) which the futures contract is based on, such as Gold, Crude Oil, and Japanese Yen.

Variation Margin

The daily profit and loss on the futures contract.

Volatility

Volatility indicates by how much the price of an asset moves from the average. Volatility can be measured over any time period, for example, daily, weekly, monthly etc. Low volatility shows that the price has remained close to the average price and high volatility indicates that the price has moved (increased and decreased) substantially.

Volume

The number of contracts traded on the exchange.