Chapter 11

When the slope of the term structure of forward prices is negative, the market is in backwardation, or is backwardated.

The basis in a forward contract is the difference between the spot (or cash) price of the referenced asset, S, and the price (F) of a forward contract with delivery T.

A calendar spread can be viewed as the difference between futures or forward prices on the same underlying asset but with different settlement dates.

When the term structure of forward prices is upward sloping (i.e., when more distant contracts have higher prices than contracts that are nearby), the market is said to be in contango.

Convenience yield, y, is the economic benefit that the holder of an inventory in the commodity receives from directly holding the inventory rather than having a long position in a forward contract on the commodity.

In the context of futures and forward contracts, a cost of carry (or carrying cost) is any financial difference between maintaining a position in the cash market and maintaining a position in the forward market.

A crisis at maturity is when the party owing a payment is forced at the last moment to reveal that it cannot afford to make the payment or when the party obligated to deliver the asset at the original price is forced to reveal that it cannot deliver the asset.

Contracts with longer times to settlement are often called distant contracts, deferred contracts, or back contracts.

On an exchange, the futures contract with the shortest time to settlement is often referred to as the front month contract.

Inelastic supply is when supplies change slowly in response to market prices or when large changes in market prices are necessary to effect supply changes.

An informationally inefficient term structure has pricing relationships that do not properly reflect available information.

The collateral deposit made at the initiation of a long or short futures position is called the initial margin.

The law of one price states that in the absence of trading restrictions, two identical assets will not persist in trading at different prices in different markets because arbitrageurs will buy the relatively underpriced asset and sell the relatively overpriced asset until the discrepancy disappears.

A maintenance margin requirement is a minimum collateral requirement imposed on an ongoing basis until a position is closed.

A margin call is a demand for the posting of additional collateral to meet the initial margin requirement.

The marginal market participant to a derivative contract is any entity with individual costs and benefits that make the entity indifferent between physical positions and synthetic positions.

The term market-to-market means that the side of a futures contract that benefits from a price change receives cash from the other side of the contract (and vice versa) throughout the contract's life.

In normal backwardation, the forward price is believed to be below the expected spot price.

In normal contango, the forward price is believed to be above the expected spot price.

The outstanding quantity of unclosed contracts is known as open interest.

With regard to supply, on one end of the spectrum is a perfectly elastic supply, in which any quantity demanded of a commodity can be instantaneously and limitlessly supplied without changes in the market price.

Rolling contracts refers to the process of closing positions in short-term futures contracts and simultaneously replacing the exposure by establishing similar positions with longer terms.

Storage costs of physical commodities involve such expenditures as warehouse fees, insurance, transportation, and spoilage.

A swap is a string of forward contracts grouped together that vary by time to settlement.