NISM Series XVI flashcards
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32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Commodity futures contract
- A standardized agreement traded on a recognized exchange to buy or sell a specified quantity and quality of a commodity at a future date and price.
- Basis
- The difference between the spot price and the futures price of a commodity. Basis = Spot price – Futures price; positive basis indicates contango, negative indicates backwardation.
- Contango
- A market situation where the futures price is higher than the spot price, often due to carrying costs such as storage, insurance, and financing.
- Backwardation
- A market situation where the futures price is lower than the spot price, typically due to strong current demand or supply shortages.
- Hedger
- A market participant who uses commodity derivatives to reduce or transfer price risk associated with an existing or anticipated physical position.
- Speculator
- A market participant who takes on price risk in commodity derivatives with the aim of earning profits from price movements, without a physical exposure.
- Arbitrageur
- A trader who exploits price differences between related markets or contracts to earn riskless profit, such as cash-and-carry arbitrage between spot and futures.
- Mark-to-market
- The daily settlement of gains and losses on open futures positions based on the daily settlement price, ensuring that losses do not accumulate.
- Initial margin
- The minimum deposit required to open a futures position, calculated to cover potential losses over a one-day horizon at a specified confidence level.
- Maintenance margin
- The minimum equity that must be maintained in a futures account; if equity falls below this level, a margin call is triggered.
- Option premium
- The price paid by the option buyer to the seller; it consists of intrinsic value and time value.
- Intrinsic value
- For a call option, max(0, underlying price – strike price); for a put option, max(0, strike price – underlying price).
- Delta
- An option Greek measuring the change in the option price for a one-unit change in the underlying price; call delta is positive, put delta is negative.
- Theta
- An option Greek measuring the change in option price with respect to the passage of time; also known as time decay.
- In-the-money option
- A call option is in-the-money if the underlying price exceeds the strike price; a put option is in-the-money if the underlying price is below the strike price.
- Limit order
- An order to buy or sell a commodity futures contract at a specified price or better; it may not be executed if the market does not reach the limit price.
- Market order
- An order to buy or sell a commodity futures contract immediately at the best available current market price.
- Stop-loss order
- An order that becomes a market order when a specified trigger price is reached, used to limit losses on an existing position.
- Open interest
- The total number of outstanding futures contracts that have not been closed or delivered; it indicates market participation and liquidity.
- Tick size
- The minimum price movement allowed for a commodity futures contract, as specified by the exchange (e.g., ₹0.01).
- Price limit
- The maximum allowable price movement in a trading session, set by the exchange to control volatility; also called circuit limit.
- Day trading
- A trading strategy where positions are opened and closed within the same trading session, avoiding overnight risk.
- Clearing corporation
- An entity that acts as the central counterparty to all trades on an exchange, guaranteeing settlement and managing default risk.
- Physical settlement
- A settlement process where the seller delivers the actual commodity and the buyer pays the agreed price, as per contract specifications.
- Cash settlement
- A settlement process where the difference between the final settlement price and the trade price is paid in cash, with no physical delivery.
- Settlement guarantee fund
- A fund maintained by the clearing corporation to cover defaults by clearing members and ensure settlement integrity.
- Position limit
- The maximum number of open futures or options contracts that a member or client can hold, set by the exchange to prevent market manipulation.
- T+1 settlement
- A settlement cycle where transactions are settled on the trade date plus one business day, common for commodity futures in India.
- SEBI
- The Securities and Exchange Board of India, the statutory regulator for securities and commodity derivatives markets in India.
- SCRA 1956
- The Securities Contracts (Regulation) Act, 1956, which provides the legal framework for regulation of securities and commodity derivatives markets in India.
- KYC compliance
- Know Your Customer norms requiring brokers to verify client identity, address, and financial details before allowing trading in commodity derivatives.
- Investor Protection Fund
- A fund maintained by exchanges to compensate investors up to a specified limit in case of default by a broker or clearing member.