Word of the DayFutures Terms that begin "C"
CTA
Commodity Trading Advisor.
Call Option
An option which gives the buyer the right, but not the obligation, to purchase ("go long") the underlying futures contract at the strike price on or before the expiration date.
Calmar Ratio
A ratio used to determine returns relative to drawdown's (downside) risk in a hedge fund or a futures portfolio or other similar investment vehicles. The Calmar ratio is determined by dividing the compounded annual return by the maximum drawdown, using the absolute value. Generally speaking, the higher the Calmar ratio the better. Some funds have high annual returns, but they also have extremely high drawdown risk. This ratio helps determine return on a downside risk-adjusted basis. Most Calmar ratios utilize 3 years of data.
Capacity
The amount of investment capital that can be comfortably absorbed by a manager or strategy without a diminishing of returns. One useful indication of whether or not a manager or strategy faces capacity constraints is to analyze the degree to which they experience slippage in the execution of their strategy or trades.
Capital Guarantee Fund
An investment vehicle offered by certain institutions that guarantees the investor's initial capital investment from any losses. Even though these products prevent investors from losing their invested capital, they also limit the amount of return that investors can obtain if the investments appreciate. This is how the offering institutions can afford to guarantee the principal investment.
Carrying Broker
A member of a futures exchange, usually a clearinghouse member, through which another firm, broker or customer chooses to clear all or some trades.
Cash Commodity
The physical or actual commodity as distinguished from the futures contract, sometimes called spot commodity or actuals.
Cash Settlement
A method of settling certain futures contracts by having the buyer (or long) pay the seller (or short) the cash value of the contract according to a procedure set by the exchanges.
Cash on Cash Return
A rate of return commonly used in real-estate transactions. The calculation determines the cash income on the cash invested: Cash on Cash returns equal the annual dollar income divided by the total dollar investment.
Certificate of Deposit (CD)
A time deposit with a specific maturity evidenced by a certificate. Large denomination CDs are typically negotiable.
Charting
The use of graphs and charts in the technical analysis of futures markets to plot trends of price movements, average movements of price, volume of trading, and open interest.
Clear
The process by which a clearinghouse maintains records of all trades and settles margin flow on a daily mark-to-market basis for its clearing members.
Clearing Broker
A member of the clearing organization for the contract being traded. All trades, and the daily profits or losses form those trades, must go through a clearing broker.
Clearing Member
A member of an exchange clearinghouse responsible for the financial commitments of its customers. All trades of a non-clearing member must be registered and eventually settled through a clearing member.
Clearing Organization
A regulated entity that is responsible for settling trades, collecting losses, and distributing gains and handling deliveries.
Clearinghouse
An agency or separate corporation of a futures exchange that is responsible for settling trading accounts, collecting and maintaining margin monies, regulating delivery and reporting trade data. The clearinghouse becomes the buyer to each seller (and the seller to each buyer) and assumes responsibility for protecting buyers and sellers from financial loss by assuring performance on each contract.
Cluster Analysis
An investment approach that places securities into groups based on the correlation found among their returns. Securities with high positive correlations are grouped together and segregated from those with negative correlation. Between each cluster, very little correlation should exist. Holding stocks in each cluster provides the investor with a diversified portfolio. Cluster analysis enables the investor to eliminate any overlap in his or her portfolio by identifying securities with related returns. This approach increases diversification, which provides the investor will a less risky portfolio. Cluster analysis has uncovered certain categories of stocks such as cyclical and growth stocks.
Commission
Fee charged by a broker for executing an order.
Commoditize
The act of making a process, good or service easy to obtain by making it as uniform, plentiful and affordable as possible. Something becomes commoditized when one offering is nearly indistinguishable from another. As a result of technological innovation, broad-based education and frequent iteration, goods and services become commoditized and, therefore, widely accessible. In the past few decades, previously "modern" things such as microchips, personal computers - even the internet itself - have become essentially commoditized. Combinations of commoditized products such as computers and business software have in effect commoditized many processes, such as business accounting and supply chain management. In a truly capitalist society, the ability to commoditize anything is seen as a benefit to all, and opens up resources that can be put to better use on innovative enterprises.
Commodity Futures Trading Commission (CFTC)
The federal regulatory agency established in 1974 that administers the Commodity Exchange Act. The CFTC monitors the futures and options on futures markets in the United States.
Commodity Pool
An enterprise in which funds contributed by a number of persons are combined for the purpose of trading futures or options contracts. The concept is similar to a mutual fund in the securities industry. Also referred to as a Pool.
Commodity Pool Operator (CPO)
An individual or organization which operates or solicits funds for a commodity pool. A CPO is generally required to be registered with the CFTC.
Commodity Trading Adviser (CTA)
The manager or adviser of a managed futures fund. The term reflects the fact that early futures markets were commodities-based and were set up to enable producers and buyers to hedge against possible price movements in the underlying asset.
Compound Annual Rate of Return (CARR)
The compounded 'growth' of an investment that has been achieved each year to enable the initial price to grow to the latest selected price over a particular time period.
Compound Annual Return
This is the rate of return which, if compounded over the years covered by the performance history, would yield the cumulative gain or loss actually achieved by the trading program during that period.
Compounding
The ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings.
Conditional Value at Risk
A risk assessment technique often used to reduce the probability a portfolio will incur large losses. This is performed by assessing the likelihood (at a specific confidence level) that a specific loss will exceed the value at risk. Mathematically speaking, CVaR is derived by taking a weighted average between the value at risk and losses exceeding the value at risk.
This term is also known as "Mean Excess Loss", "Mean Shortfall" and "Tail VaR". Conditional Value at Risk was created to be an extension of Value at Risk (VaR). The VaR model does allow managers to limit the likelihood of incurring losses caused by certain types of risk - but not all risks. The problem with relying solely on the VaR model is that the scope of risk assessed is limited, since the tail end of the distribution of loss is not typically assessed. Therefore, if losses are incurred, the amount of the losses will be substantial in value.
Constant Proportion Portfolio Insurance (CPPI)
A strategy that synthetically reproduces the pay-out of a put or call option through dynamically adjusting the delta hedge of the underlying asset. Unlike a conventional option, the investment exposure (or participation) of the underlying asset will change over the life of the structure.
Contango
A futures market in which prices in succeeding delivery months are progressively higher. The opposite of Backwardation.
Contract
1) The unit of trading for a particular futures contract (e.g., one contract may be 100 shares of an underlying security) 2) the type of futures being traded (e.g., futures on ABC stock).
Contract Month
The last month in which delivery is made against the futures contract or the contract is cash settled. Sometimes referred to as the delivery month.
Convertible Arbitrage
Convertible Arbitrage involves purchasing a portfolio of convertible securities, generally convertible bonds, and hedging a portion of the equity risk by selling short the underlying common stock. Certain managers may also seek to hedge interest rate exposure under some circumstances. Most managers employ some degree of leverage ranging from zero to 6:1. The equity hedge ratio may range from 30 to 100 percent. The average grade of bond in a typical portfolio is BB-, with individual ratings ranging from AA to CCC. However, as the default risk of the company is hedged by shorting the underlying common stock, the risk is considerably better than the unhedged bond's rating indicates.
Convertible Bond
A bond issued by a company that has a set maturity date and pays interest in the form of a coupon. It has features of both a bond and stock and its valuation reflects both types of instrument. It gives the holder the option to convert the bond into a specific number of shares of the issuing company - in other words, it has an 'embedded option'.
Correlation
Correlation is a measure of the interdependence or strength of the relationship between two investments. It tells us something about the degree to which the variations of returns from their respective means move together. So if two investments are positively correlated, when one performs above its mean return it is likely that the other will also perform above its own mean return. If two investments are negatively correlated, when one performs above its mean return it is likely that the other will perform below its mean return. Note that correlation says nothing about the mean returns themselves - they could both be up, or both down, or one could be up and one down. To measure the strength of the relationship, we use the correlation coefficient. Values range from -1 (perfect negative correlation), through 0 (no correlation or uncorrelated) to +1 (perfect positive correlation). From a risk management perspective, it is generally favorable if two investments are uncorrelated because it means that there is no identifiable directional pattern or proportional relationship between the deviations of their monthly returns from each of their respective trends - sometimes investment B is positively correlated to investment A when the returns of A are positive and negatively correlated when they are negative, meaning that over a period of time our strategy returns get closer to non-correlation. This produces a smoother overall return profile.
Correlation Coefficient
A measure that determines the degree to which two variable's movements are associated. The correlation coefficient will vary from -1 to +1. A -1 indicates perfect negative correlation, and +1 indicates perfect positive correlation.
Covariance
A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns move together. A negative covariance means returns move inversely. One method of calculating covariance is by looking at return surprises (deviations from expected return) in each scenario. Another method is to multiply the correlation between the two variables by the standard deviation of each variable.
Covered Option
A short call or put option position which is covered by the sale or purchase of the underlying futures contract or physical commodity.
Cross Correlation
A statistical measure timing the movements and proximity of alignment between two different information sets of a series of information. Cross correlation is generally used when measuring information between two different time series. The range of the data is -1 to 1 such that the closer the cross-correlation value is to 1, the more closely the information sets are.
Cross-Hedging
Hedging a cash commodity using a different but related futures contract when there is no futures contract for the cash commodity being hedged and the cash and futures market follow similar price trends (e.g., using soybean meal futures to hedge fish meal).
Cumulative Return
The aggregate amount that an investment has gained or lost over time, independent of the period of time involved. Presented as a percentage, the cumulative return is the raw mathematical return of the following calculation, Current price of Asset minus Original price of Asset divided by the Original price of Asset.
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