Glossary

Backwardation

Backwardation is a market condition where the spot price of the underlying asset is higher than its futures price. It typically occurs when there is greater demand for the asset in the present compared to contracts expiring in the future.

Bear Call Spread

A Bear Call Spread, also known as a Short Call Spread or Call Credit Spread, is an options strategy that profits when the underlying asset's price declines or remains below the short call's strike price.

Bull Calendar Spread

A bull calendar spread is an options trading strategy that involves buying and selling call options with the same strike price but different expiration dates, where the longer-dated option is purchased, and the shorter-dated option is sold.

Contango

Contango is a market condition where the futures price of a commodity is higher than its current spot price. It often happens when traders expect the price of the commodity to rise in the future after factoring in costs like storage, insurance, and interest.

Cost of Carry

Cost of carry is the extra money you pay to keep an investment instead of selling it immediately. This includes expenses like financing costs, storage costs in holding the asset, and interest on loans used to invest.

Counterparty Risk

Counterparty risk is the risk that the other person or party in a financial deal might not keep their promise, like not paying or not delivering what they agreed to.

Currency Swap

A Currency swap is a financial agreement between two parties to exchange interest payments and principal amounts in different currencies over a set period of time.

Delta Neutral

Delta neutral is a portfolio or trading strategy where the overall delta of the position is zero, meaning the portfolio's value does not change with small movements in the underlying asset's price.

Derivative Markets

Derivative Markets are financial markets where derivative instruments, such as futures, options, swaps, and forwards, are traded. These instruments derive their value from an underlying asset, such as stocks, commodities, currencies, interest rates, or indices.

Exposure Margin

Exposure margin is a type of margin that brokers charge to help protect against market fluctuations and potential losses in futures and options (F&O) trading. It is often referred to as an additional margin.

Future Contracts

A futures contract is a standardised legal agreement to buy or sell a specific asset, such as commodities, currencies, or financial instruments, at a predetermined price on a specified future date.

Futures

A future is a type of mutual agreement between two parties where they decide to buy or sell a particular asset security at a predetermined price on a future date. It is widely used in financial markets for hedging against price fluctuations and for speculative trading to profit from price movements.

Futures Expiration and Contract

Futures expiration is the date on which a futures contract officially ends or expires. After this date, the contract is no longer valid for trading. After the futures contract expiration, the contract closes through cash or delivery.

Hedging with Futures

Hedging with futures involves taking an offsetting position in a futures contract to protect against potential losses in an existing investment.

Index Futures

Index futures are contract agreements between two parties where a stock market index (such as Nifty or Sensex) is the underlying asset. These contracts are bought and sold at a predetermined price to be settled on a future date.

Interest Rate Swap

Interest Rate Swaps (IRS) are financial contracts where two parties agree to exchange interest payments on a fixed notional amount for a set period. Typically, one party pays a fixed interest rate, while the other pays a floating interest rate

Option Buying

Option buying is a trading strategy where an investor pays a premium to purchase call or put options, giving them the right but not the obligation to buy or sell an underlying asset at a predetermined price before a certain date specified by the exchange.

Option Margin

Margin in options is the capital a trader must maintain in their account when entering into certain options trades, especially when writing (selling) options.

Option Writing

Option writing, also known as option selling, is the process of selling a call or put option, where the writer (seller) must fulfil the terms of the contract if the buyer exercises the option.

Stock Futures

Stock futures are contract agreements between two parties that have stock as the underlying, and these are bought and sold at a predetermined price on a future date. Stock futures instruments enable stock traders to speculate on the future price movements of individual stocks or to hedge existing positions against potential market volatility.