- It is the art of buying something cheap in one place and selling it at a profit somewhere else. The global electronic trading has made this process much easier, enabling arbitrageurs – as they’re called – to switch huge sums of money across continents in seconds in attempt to exploit small differences in the quoted price of investment in different markets.
- Bear Market
- A market condition in which the price of financial instruments are falling. As investors anticipate downside, they take short positions to profit from the negative moves.
- Bid Price
- The price at which a market participant is prepared to buy a commodity is known as bid price.
- Bull Market
- A financial market of a group of instruments in which prices are rising or are expected to rise. Bull markets are characterized by optimism, investor confidence and economic prosperity.
- Gold and silver that is officially recognized as high quality (at least 99.5% pure), and is in the form of bars rather than coins.
- Clearing, Settlement & Reporting.
- Cash Settled Futures
- A market in which future contracts of commodities are bought and sold by market participants. This market does not involve physical delivery rather positions are settled only in the form of cash. The trader who makes a profit gains cash while the trader who incurrs loss pays in the form of cash.
- Cash Settlement
- A method of settling futures or options contracts whereby the market participants settle in cash payment of money rather than delivery of the commodity.
- Chicago Mercantile Exchange – CME
- One of the world’s largest and oldest exchanges for futures and options trading. It is the largest commodity exchange in the U.S. Prices quoted on P.M.E.X are directly synced with real time prices prevalent at Chicago.
- A basic good used in commerce that is interchangeable with other commodities of the same type. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When they are traded on an exchange, commodities must also meet specified minimum standards, also known as a basis grade.
- Contract Month
- The month in which delivery is to be made in accordance with the terms of the futures contract; also referred to as Delivery Month. However, cash settled futures trade prevalent at PMEX does not involve delivery of the commodity.
- A derivative instrument is a contract between two parties that specifies conditions (especially the dates and values of the underlying commodities) under which payments, or payoffs, are to be made between the parties.
- Discretionary Account
- An arrangement by which the owner of the account gives written power of attorney to someone else, usually the broker or a Commodity Trading Advisor, to buy and sell without prior approval of the account owner. Also referred to as a Managed Account. It is pertinent that entire risk is borne by account holder.
- Exchange Clearing House
- Each futures exchange has a clearing association which operates in conjunction with the exchange in a manner similar to a bank clearing house. PMEX has an in house clearing department. All brokers are members of the “Clearing House” and must put up fixed original margins and maintain them with the clearing house in the event of adverse price fluctuations.
- Futures Contract
- A legally binding agreement to buy or sell a commodity or financial instrument at a later date. Futures contracts are normally standardized according to the quality, quantity, delivery time and location for each commodity, with price as the only variable.
- A transaction tending to the opposite effect of original transaction, engaged in to minimize a potential loss of the latter. Large financial institutions are generally involved in hedging. Traders tend to go for hedging once they are uncertain about the future price trend of any commodity.
- Initial Margin
- A small amount demanded by the exchange from trader in advance to trade in any commodity. It generally varies b/w 3-10% of the total value of the contract. This inherent feature makes futures trading a risky prospect if not managed properly.
- Karachi Interbank Offered Rate (KIBOR) is a daily reference rate based on the interest rates at which banks borrow unsecured funds from other banks in the Pakistan wholesale money market (or interbank market). It is used as a benchmark rate by commercial banks to charge interest to their customers.
- The ability to control large dollar amounts of a commodity with a comparatively small percentage (5 to 10%) of actual capital required. More leverage means higher risk. PMEX allows a leverage of about 20 times to traders free of charge.
- A buyer of a futures contract. Someone who buys a futures contract is often referred to as being long in that particular contract. Traders take long positions if they perceive a hike in prices.
- Margin Call
- A requirement for an increase in the original deposit placed on a futures contract when the buyer/ seller has increased the number of contracts or when market prices have become heavily adverse. Ignoring a margin call may result in auto-liquidation of the position by the exchange.
- Margin Trading
- A term describing the process by which commodity speculators trade in futures by only the margin (i.e. the deposit) on a contract valued many times higher than the margin, thus permitting, if successful, a profit far exceeding the original outlay.
- A margin is cash or marketable security deposited by an investor with the broker. The balance in the margin account is adjusted to reflect daily settlement.
- Mark to Market Revaluation Exchange Rate
- This exchange rate is published by State Bank of Pakistan on daily basis for all major foreign currencies. It is the official conversion rate used by PMEX for converting the foreign currencies into Pak Rs. to settle trader’s accounts.
- Marked to Market
- A calculation of the profit or loss made on trading of financial instruments by comparing the contracted prices for an asset with the closing market price. All open positions in the market are daily adjusted by this method and the financial effect is reflected in the trader’s account.
- Related to or characteristic of trade or traders; commercial activity.
- Net Liquidity
- Total cash balance of the account at any particular time. This figure incorporates the profit or loss effect of trading activity. It is a floating figure and varies with fluctuations in commodity price.
- The New York Mercantile Exchange (NYMEX) is a commodity futures exchange owned and operated by CME Group of Chicago.
- Offer Price
- The price at which a market participant will sell a commodity.
- Open Interest
- Open Interest is the total number of contracts outstanding. It is equal to the number of long positions or number of short positions.
- An instruction from a client to a broker to buy / sell a commodity. An order may be a market order to buy or sell at the best price the broker can obtain at the time of execution. Alternatively, the client may impose a limit order to buy / sell only if the price hits a specified level.
- When a trader has an open buy or sell contract in the market. When the trader has executed both sides of the transaction, position is said to be zero or squared.
- Realized Profit / (Loss)
- Profit / (Loss) made on a closed position.
- A trader who trades for small, short-term profits during the course of a trading session, rarely carrying a position overnight.
- A seller of a futures contract. Someone who sells a futures contract is often referred to as being short in that particular contract. Traders take short positions if they perceive a decline in price.
- Spot Price
- The current price at which a particular commodity can be readily bought or sold at the specified time and place.
- The difference between the current bid and the current ask of a given commodity on an exchange. It varies with each commodity. Higher the value of any commodity, greater would be the spread in its quoted price.
- Trader Account management System. A secure platform used by PMEX brokers to manage the day to day operations of the brokerage house and its clients.
- Unrealized Profit / (Loss)
- Profit / (Loss) on a position currently open in the market and without commission. This figure keeps fluctuating as the prevailing prices vary.
- Value-At-Risk (VAR)
- VAR models are used to calculate the risks involved in ownership of financial securities which are subject to changing market prices of the underlying assets. This model is also used by PMEX to determine and revise the initial margins set for trading any commodity.
- A measure of the change in price over a given time period. Higher the volatility in any commodity, greater the risk involved in trading it. Traders stand a greater chance of buying at a peak and selling in a trough in such a scenario.
- Working Orders
- Limit Orders placed in the market but not executed. Execution of these orders is subject to fulfilment of certain pre-conditions specified by the trader at the time of placing that order.