The Long Co. Premier Consultants to the Baking Industry since 1900.

Glossary of Commodity Terms


at-the money option: An option whose strike price equals, or is approximately equal to, the current market price of the underlying futures contract.
basis: the difference between the price of a commodity and the price of a related futures contract, i.e., cash price futures price = basis
call option: an option that gives the option buyer the right to buy (go "long") the underlying futures contract at the strike price on or before the expiration date of the option.
cash market: a market in which physical commodities are bought and sold.
cash price: the price of an ingredient through a particular supplier.
Clearing Corporation: the organization that clears Chicago Board of Trade futures and futures options trading activity to make sure buyers’ and sellers’ records agree and that contracts are honored.
commission: fees paid to a broker for executing a futures or options order.
correlation: the causal relationship between changes in the value of the futures contract and changes in the value of the hedged item.
cross-hedge: a hedge initiated to cover price risk in one commodity using a different but related futures contract when there is no futures contract available for the item being hedged (e.g., hedging wheat flour with wheat futures).
exercise: the action taken by the holder of a call if he or she wishes to purchase the underlying futures contract or by the holder of a put if he or she wishes to sell the underlying futures contacts.
expiration date: the last day an option can be exercised. Options expire during the month proceeding the futures contract delivery month. For example, March wheat options expire in February.
forward contract: a cash market agreement in which a seller agrees to deliver a specific cash commodity to a buyer sometime in the future at a predetermined price. Also referred to as a long-term purchase agreement.
futures contact: a contract traded on a futures exchange for the delivery of a specified commodity at a future time. The contract specifies the item to be delivered and the terms and conditions of delivery.
futures market: a market in which futures contracts are bought and sold.
futures price: the price of a specific futures contract.
hedge: buying or selling a futures or options contract for protection against the possibility of a price change in the physical commodity or ingredient one is planing on buying or selling.
hedger: a market participant who buys or sells a futures or options contract for protection against the possibility of a price change in the physical commodity or ingredient.
in-the-money option: a call is in the money if its strike price is below the current price of the underlying futures contract (i.e., if the option has intrinsic value). A put is in the money if its strike price is above the current price of the underlying futures contract (i.e., if the option has intrinsic value).
intrinsic value: the dollar amount that would be realized if the option were to be exercise immediately. See in-the-money option.
long: buying a futures or options contract.
long hedge: buying a futures or options contract to protect the purchase price of a commodity or ingredient one is planning to purchase.
long-term purchase agreement: a cash market agreement in which a seller agrees to deliver a specific cash commodity to a buyer sometime in the future at a predetermined price. Also referred to as a forward contract.
margin: in the futures and futures/options markets, this is an amount of money deposited to ensure fulfillment of the contract at a future date. Both buyers and sellers of a futures contract must initiate and maintain a margin account. Only sellers of options are required to initiate and maintain a margin account. Option buyers do not have margin requirements.
offset: taking a second market position opposite to the initial position (also referred to as close out).
option: within the futures industry, this is a contract that conveys the right, but not the obligation, to buy or sell a futures contract at a certain price for a limited time. See call option and put option.
out-of-the money option: a call or put option that currently has no intrinsic value. That is, a call whose strike price is above the current futures price or a put whose strike price is below the current futures price.
premium: the price of a particular option contract as determined by option buyers and sellers at a futures exchange. Premium does not include related brokerage commission fees. The premium is the maximum cost (loss) an option buyer may be subject to.
put option: an option that gives the option buyer the right to sell (go "short") the underlying futures contract at the strike price on or before the expiration date of the option.
short: selling a futures or options contract.
short hedge: selling a futures or options contract to protect the value of a commodity or ingredient one currently owns.
spot cash price: the current ingredient price quoted by your supplier.
strengthen: refers to basis movement where the price of a cash commodity increases relative to the price of a specific futures contract. A long hedger does not benefit from a strengthening basis. A short hedger benefits from a strengthening basis.
strike price: the price at which the holder of a call (put) may choose to exercise his or her right to purchase (sell) the underlying futures contract.
time value: the amount by which an option’s premium exceeds the option’s intrinsic value. If the option has no intrinsic value, its premium is composed entirely of time value.
transaction costs: commission fee and opportunity cost of margin capital.
underlying futures contract: the specific futures contract that may be bought or sold by the exercise of an option.
weaken: refers to basis movement where the price for a cash commodity declines relative to the price of a specific futures contracts. A long hedger benefits from a weakening basis. A short hedger does not benefit from a weakening basis.

*Food Processors Series, Strategies for Managing Price Risk, CBOT, undated.

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