Good Derivatives: A Story of Financial and Environmental Innovation

Glossary

Unless otherwise specified, financial terms have been taken from the U.S. Commodity Futures Trading Commission Glossary, and environmental terms have been taken from the United Nations Environment Programme Glossary or the United Nations Framework Convention on Climate Change glossary.*

arbitrage A strategy involving the simultaneous purchase and sale of identical or equivalent commodity futures contracts or other instruments across two or more markets in order to benefit from a discrepancy in their price relationship. In a theoretical efficient market, there is a lack of opportunity for profitable arbitrage.

ask The price level of an offer to sell, as in bid-ask spread.

basis The difference between the spot or cash price of a commodity and the price of the nearest futures contract for the same or a related commodity (typically calculated as cash minus futures). Basis is usually computed in relation to the futures contract next to expire and may reflect different time periods, product forms, grades, or locations.

basis risk The risk associated with an unexpected widening or narrowing of the basis between the time a hedge position is established and the time it is lifted.

bid An offer to buy a specific quantity of a commodity at a stated price.

bid-ask spread The difference between the bid price and the ask or offer price.

broker A person paid a fee or commission for executing buy or sell orders for a customer. In commodity futures trading, the term may refer to: (1) floor ...