The commodity-product spread is the difference between the price of a raw material commodity and price of a finished product created from that commodity. A common commodity-product spread is the "crack spread". This is the spread between the price of crude oil and the price of refined oil products. Betting on changes in the commodity-product spread is a popular trade in the futures market. The trade can be very useful for firms which convert raw materials to products. These firms could buy commodity futures and sell product futures, hedging risk and helping to lock in profit margins.
A theory that the interest rate differential between two countries is equal to the differential between the forward exchange rate and the spot exchange rate. Interest rate parity plays an essential role in foreign exchange markets, connecting interest rates, spot exchange rates and foreign exchange rates. |||The relationship can be seen when you follow the two methods an investor may take to convert foreign currency into U.S. dollars. Option A would be to invest the foreign currency locally at the foreign risk-free rate for a specific time period. The investor would then simultaneously enter into a forward rate agreement to convert the proceeds from the investment into U.S. dollars, using a forward exchange rate, at the end of the investing period. Option B would be to convert the foreign currency to U.S. dollars at the spot exchange rate, then invest the dollars for the same amount of time as in option A, at the local (U.S.) risk-free rate. When no arbitrage opportunities exist, the cash flows from both options are equal.
The primary market for trading metals such as gold, silver, copper and aluminum. Formerly known as the Commodity Exchange Inc., the COMEX merged with the New York Mercantile exchange in 1994 and became the division responsible for metals trading. The merger between Commodity Exchange Inc. and the New York Mercantile exchange has created the world's largest physical futures trading exchange. Since the merger in 1994, the COMEX division has incorporated the trading of aluminum future contracts.
A differential measuring the gap in interest rates between two similar interest-bearing assets. Traders in the foreign exchange market use interest rate differentials (IRD) when pricing forward exchange rates. based on the interest rate parity, a trader can create an expectation of the future exchange rate between two currencies and set the premium (or discount) on the current market exchange rate futures contracts. |||The IRD is a key component of the carry trade. For example, say an investor borrows US$1,000 and converts the funds into British pounds, allowing the investor to purchase a British bond. If the purchased bond yields 7% while the equivalent U.S. bond yields 3%, then the IRD equals 4% (7-3%). The IRD is the amount the investor can expect to profit using a carry trade. This profit is ensured only if the exchange rate between dollars and pounds remains constant.
Any order to buy or sell a security that automatically expires if not executed on the day the order is placed. A day order will not be executed if the limit or stop order prices were not met during the day. A way to increase the life of an order is to order securities on a "good until canceled" basis, in which the trade will not expire until it is canceled or until it reaches a maximum time limit set by the brokerage.
A trading market that is typically only accessible by banks and financial institutions. The interdealer market is an over-the-counter market that is not restricted to a physical location; rather, it is a global market where representatives of banks and financial institutions execute trades through their trading terminals. |||The foreign exchange interdealer market is one of the better-known interdealer markets and is characterized by large transaction sizes and tight bid/ask spreads. Currency transactions in the interdealer market can be either speculative - initiated with the sole intention of profiting from a currency move - or customer-driven (by an institution's corporate clients such as exporters and importers, for example).
A trading strategy used in the soybean futures market to establish a processing margin. By simultaneously purchasing soybean futures and selling soybean meal futures, a trader is attempting to establish an artificial position in the processing of soybeans, created through the spread.
A situation arising when the bid price of a security exceeds the ask price. Contrary to normal markets where the bid-ask spread is positive, in a cross market the spread is negative. This scenario occurs mainly in volatile and high volume trading. This abnormal market condition occurs mainly in the Nasdaq exchange on orders entered before the opening bell.
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