Glossary

Arbitrage

An arbitrage is a trading strategy that involves buying and selling similar assets in different markets to take advantage of the price difference. It involves buying an asset in one market at a lower price and simultaneously selling it in another market at a higher price.

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.

Bid-Ask Spread

The bid-ask spread is the difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask) for a security.

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.

Capital Preservation

Capital preservation is a conservative investment strategy that prioritises protecting the principal amount of investment, even at the cost of lower returns. Capital preservation is more suitable for risk-averse investors.

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.

Daily Margin Statement

A Daily Margin Statement is a report issued by brokers to traders detailing margin requirements, available balance, utilised margin, and any shortfalls in their trading account for a given trading day. It helps traders track their margin status and ensures compliance with regulatory requirements.

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.

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.

Fibonacci Retracement

Fibonacci retracement is a widely used technical analysis tool that traders use to identify potential support and resistance levels. Based on the famous Fibonacci sequence, this tool helps forecast the likely levels where a stock might reverse its trend.

Financial Leverage

Financial leverage refers to the strategic use of borrowed capital (debt) to finance investments or business operations with the goal of increasing the potential return on equity.

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 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.

Hedgers

Market participants who use futures & options to protect their open position in the underlying asset from price fluctuations in the spot market are known as hedgers.

Hedging with Futures

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

Impact Cost

Impact cost refers to the cost incurred when executing a buy or sell transaction of a security. It depends on the liquidity of the asset.