Speculator

When dealing with futures, three broad types of traders can be identified: hedgers, arbitrageurs, and speculators. A speculator has a view on the future movements of a market and can use futures contracts to bet on his outlook. Consider, for example, a speculator who believes that a certain asset price is likely to increase.

One possibility of betting on this price movement is to take a long position in a futures contract on this asset. The difference from a purchase in the spot market is that the futures market allows the speculator to obtain leverage.

Speculators can be divided into three groups according to the term of holding a position: scalpers, day traders, and position traders. Scalpers are watching for very short-term trends, usually a few minutes, and attempt to realize profits from small changes in the contract price.

Day traders hold a contract for less than one trading day and do not take the risk of potential bad news overnight. Position traders hold their contracts for a much longer period and look forward to significant profits from major movements in the market.

Speculator

Spin Off

A spin of is a divestiture, where a division of a company is turned into an independent business. The subsidiary is now a separate legal entity with an independent management. Shareholders of the parent company usually receive shares of equal value to their former holding in the new company.

In contrast to a sell off, usually no cash is generated. Companies often sell unproductive or noncore subsidiary businesses as a spin off. The main reason for this is that the value of the parts of the separated companies is supposed to be greater than before, thus increasing shareholder value.

The management of the spin of is set free from the parent company. This provides new incentives as it can now focus exclusively on the opportunities of the special business segment. Furthermore, spin of s have to issue separate financial statements, so that shareholders receive more detailed information concerning the performance of the company.

This helps attract more investors. On the contrary, expenses in marketing, administration, and research tend to rise with the business now operating on its own. Raising capital from banks or institutional investors might also be more dii cult for smaller companies. Partial spin offs are also known as equity carve outs.

In this case, the parent company only sells a minority of shares in a subsidiary keeping a controlling stake. The rest of the shares are usually spun of later when the stock price has risen. Spin of s also refer to university research groups or business incubators setting up a new company.

Spin Off

Spot

The spot price, also called spot rate, is the price that is quoted for immediate payment and delivery. In the case of foreign exchange the settlement usually takes place one or two business days at er the trade day. In the spot market for commodities, the time span from the trade day to the settlement day can take up to one month.

This is in contrast with a forward or futures contract, where the price is set today but the delivery will occur at a fixed date in the future, often 3–6 months. Interestingly, even the so-called spot indices do not measure the actual spot prices but rather the prices of nearby futures contracts.

This is because the spot market is highly illiquid for some commodities, such as crude oil, and thus has to be approximated. h e spot-future parity states that the connection between the spot price S_t and the futures price F_t,T with maturity at time T is as follows: F_t,T = S_t e^(r+c–y)T, where r is the risk-free interest rate.

In the case of commodities, the storage costs c and the convenience yield y from holding y the commodity in storage have to be considered as well. If the equation is not met, a risk-free profit can be realized. Although the futures price F_t,T theoretically should be an unbiased expectation of future spot prices E[S_T], forecasts based on spot prices have been found to be as good as forecasts based on futures prices. This can be traced back to market imperfections such as transaction costs, tax distortions, and unequal distribution of information.

Spot

Spot Commodity

On the spot market (also called physical market or cash market) the traders buy or sell commodities for cash at the current (spot) price determined by the characteristics of the supply and the demand of each commodity. A physical delivery is expected to be done immediately or as the case may be within a commodity-specific time period.

Unlike in commodity future markets, there is no cash settlement. The spot price normally means free on board (FOB). Future prices are determined by the spot price of a commodity. Accordingly, spot commodity price P_Spot can also be calculated through the present value of a future contract P_F considering the risk-free rate r, the cost of storage c, the convenience yield y, and time to maturity of the future contract t:

P_Spot = P_F / e^(r+c-y)t

At maturity the price of a commodity future is the same as the spot commodity. During its expiring month, a future, therefore, can also be called spot commodity. Index provider like Commodity Research Bureau, Goldman Sachs, Dow Jones, Standard and Poor’s, Morgan Stanley, Lehman Brothers, Merrill Lynch, and Deutsche Boerse calculate spot indices for single commodities or groups of commodities.

Spot Commodity

Spot Month

The spot month is the contract month of a futures contract, which is the present calendar month. It is the adjacent month in which the commodity could be delivered in order to satisfy the contract.

The delivery date is one of several features of a futures contract, which references the spot month; this is the date on which the parties are required to complete the terms of the contract. Delivery on a contract is typically determined on a specific day or days of the month; trading in the futures contract comes to an end on or prior to the delivery date.

For example, the Brent Crude oil futures which are traded on the International Petroleum Exchange in London have monthly delivery dates over the next 12 months, quarterly delivery dates for the following 12 months and half-yearly dates for the following year afterwards.

Trading in the Brent Crude oil futures for a specific delivery month stops trading on the trading day immediately before the 15th day before the first business day of the delivery month. This delivery month is also referred to as the spot month as this is when the commodity may be delivered to settle the contract.

Spot Month

Spreading

A trading strategy consisting of simultaneously purchasing and selling of two different but related futures contracts is called spreading or a spread trade. The spread is simply the price difference between both the futures contracts. Traders start spread trades when they believe that the price differences between two contracts will alter to their benefit before the trade is of set.

A spread position is usually less risky than assuming a complete position in the market as the two positions are presumed to partly hedge each other. Spread positions can be classii ed into at least three broad categories: interdelivery spread, intercommodity spread, and intermarket spread.

When a spread trade entails futures with two dif erent contract months but written on the same underlying commodity, it is dei ned as an interdelivery spread. This is a broadly used kind of spread trade and two well-known strategies are the bull spread and the bear spread.

An intercommodity spread involves simultaneously purchasing one futures contract and the selling of a different but related futures contract that expires during the same month. Intercommodity spread traders must be careful about the choice of the two underlings they combine. Any two contracts will not do, contracts should be related so their prices normally increase or decrease jointly, or at least their price dif erence should tend to follow pattern.

Typical choices are: contracts whose underlings compete with each other—for example, cattle (beef) and hogs (pork) contracts at the Chicago Mercantile Exchange (CME); contracts whose underlings can be af ected by the same general event—a drought would af ect both corn and wheat, contracts at the CBOT; or contracts where one commodity is physically derived from another—for example, oil and gasoline contracts traded at Euronext Liffe.

Two famous intercommodity spreads are the crack spread and the crush spread. The name of the crack spread strategy is derived from the fact that "cracking" oil creates gasoline and heating oil.

The strategy is generated by buying oil futures and selling gasoline and heating oil futures, and the investment alignment permits the investor to hedge against risk as a result of the of setting nature of the underlings. A crush spread uses in the soybean futures market and consists of simultaneously purchasing soybean futures and selling soybean meal futures.

The intermarket spread involves buying and selling the same futures contract—same commodity and delivery month—at two dif erent exchanges, even in two diferent countries. Example of futures contract on a same underlying traded in various exchanges are, for example, gold futures, which are traded in Chicago, New York, and London exchanges or cotton, copper, and sugar that are traded in New York and London.

In many exchanges, the most famous spreads can be traded directly, that is, a trader would not need to give two different orders simultaneously; rather she would give only one order directly on the spread and quote the price dif erence of the two positions. Spread strategies are traded in both electronic and open outcry trading exchanges.

Spreading

Staging

The term "staging" refers in venture capital finance to the stylized fact that capital contributions of investors to portfolio firms are typically portioned, for example, capital staged. This behavior relates to the problem that during the financing of start-up ventures (non) verifiable information about project value is becoming available only successively.

The cash provisions to the start-up companies are such that the next performance milestones are attainable. Hence, by staging capital provisions venture capitalists are able to check whether the expected net capital return of investing in the next project stage is still positive. Previous investment costs are sunk.

The economic rationale to this behavior is that ceteris paribus (c.p.) the ex ante overall firm value, is higher compared to a situation where the founder gets the whole planned investment sum upfront.

This is because the founder usually invests none or little of his own capital but participates proportionally in the total project returns. Hence, there is the possibility that he does not have the right incentives to abandon timely projects with an overall negative capital return.

Theoretical analyses have shown that the efficient decision about project continuation should be transferred to an informed investor, that is, a venture capitalist, whereby the detailed specii cation of the financing contract depends on further circumstances.

For example, there could be informational asymmetries between the project founder and the venture capitalist caused by "window dressing", that is, the manipulation of signals about project quality by the project founder. In such cases the combination of capital staging and convertible securities could provide an efficient solution.

Staging