NISM Series XVI key terms

A physical good such as gold, crude oil, or wheat that is traded in bulk and is largely interchangeable with other units of the same grade and origin.

A financial contract whose value is linked to the price of an underlying physical commodity, settled in cash or by delivery of the goods.

The segment where commodities are bought and sold for immediate payment and near-immediate delivery, as opposed to a future date.

The price quoted today for immediate delivery of a commodity at a specified location and grade. It anchors the pricing of derivatives.

A privately negotiated agreement between two parties to buy or sell a commodity at a fixed price on a future date, with no exchange or clearing house involved.

A standardized, exchange-traded agreement to buy or sell a fixed quantity and quality of a commodity at a set price on a specified future date, cleared through a clearing corporation.

The exchange-defined terms of a futures contract, covering the underlying grade, trading unit, delivery months, price quotation, tick size, and delivery location.

The smallest permitted price movement in a contract, set by the exchange. Profit or loss per tick equals tick size multiplied by the contract trading unit.

The number of underlying units represented by one futures or options contract, used to convert a price change into rupees of gain or loss.

The fixed quantity of the underlying commodity that one contract covers, as laid down in the exchange's contract specification and used for order entry.

A contract giving the buyer the right, but not the obligation, to buy or sell a commodity futures contract at a stated price on or before expiry.

The price the option buyer pays the seller for the right conveyed by the option contract. It is the maximum loss for a long option position.

The fixed price at which an option holder may buy or sell the underlying futures contract if the option is exercised.

Describes an option that has positive intrinsic value: a call when the underlying price exceeds the strike, a put when it is below.

The amount by which an option is in the money, calculated as the excess of underlying price over strike for a call, or strike over underlying price for a put.

The part of an option premium that exceeds intrinsic value, reflecting the chance that the option becomes more valuable before expiry. It erodes as expiry approaches.

The difference between the local spot price of a commodity and the price of the relevant futures contract, usually quoted as spot minus futures.

A market condition where futures prices for later delivery months are higher than for nearer months, typically reflecting storage, insurance, and financing costs.

A market condition where nearer delivery futures trade above later months, often signalling tight nearby supply or strong immediate demand for the physical commodity.

The tendency of a futures price to move towards the spot price as the contract nears expiry, so that basis shrinks towards zero at delivery.

The total expense of holding a physical commodity or a long futures position, comprising storage, insurance, transport, and the financing cost of funds tied up.

Taking an offsetting position in a derivative to reduce the risk of adverse price moves in a physical commodity exposure, such as a stockpile or a forward sale commitment.

Trading derivatives to profit from anticipated price movements rather than to offset an existing exposure, thereby accepting price risk in return for potential gain.

Simultaneously buying and selling the same or equivalent commodity in different markets or delivery months to profit from price discrepancies, which tends to narrow those discrepancies.

The total number of outstanding futures or options contracts that have not been closed out or delivered, a measure of market participation and liquidity.

The number of contracts traded during a specified period, such as a trading session. It indicates activity, while open interest indicates positions still outstanding.

The ease with which a position can be entered or exited at a fair price without moving the market, reflected in tight spreads and deep order books.

Funds deposited by a trader with the member as collateral against possible losses on futures positions, ensuring obligations can be met.

The minimum collateral required before a new futures position may be opened, set by the exchange or clearing corporation based on price volatility and position size.

The daily revaluation of open positions at the settlement price, with gains credited to and losses debited from the member's or client's account.

The official price fixed by the exchange at the close of each trading day, used to mark positions to market and to compute daily obligations.

The entity that interposes itself between buyer and seller, becoming counterparty to every trade and guaranteeing settlement through novation and a settlement guarantee fund.

The process by which the clearing corporation replaces the original bilateral contract between buyer and seller with two separate contracts, one with each side.

The risk that the other party to a contract defaults on its obligation. Exchange clearing is designed to remove this risk from individual trades.

The process of fulfilling a futures contract by transferring the physical commodity and documents, or by cash settlement, at expiry according to exchange rules.

A document issued by an accredited warehouse confirming that a stated quantity and grade of commodity is held in storage, and which may be used to support delivery.

A storage facility approved by the exchange to hold deliverable commodity and issue receipts acceptable for settlement of futures contracts.

A cap set by the regulator or exchange on the number of contracts a member or client may hold in a commodity, aimed at curbing concentration and manipulation.

The mandatory process of identifying clients, verifying documents, and assessing their financial position and trading experience before registering them for commodity derivatives.

The framework of margin collection, position monitoring, exposure limits, and surveillance that members and exchanges use to contain losses and default risk.