B

Backwardation

Description of a market in which the future price of a commodity is lower than the spot price (see also contango).

Back Testing

Testing a model (eg value-at-risk model) using historical data.

Barrier Option

Option where the ability of the holder to exercise is activated (or extinguished) when the underlying asset reaches a pre-specified level. Also known as a trigger option.

Barrel (bbl)

Standard measure of oil equal to 42 US Gallons or 127.2 litres

Base Metals

The more common and chemically active non-precious metals (eg Lead, Zinc, Copper, Nickel)

Basis

The difference between the spot price and the futures price of a commodity.

Basis Risk

The risk that the value of a futures or forward contract does not move in line with that of the underlying exposure. In commodity markets basis risk has 3 forms:

Locational Basis Risk: arises from mismatches between the delivery location of the underlying asset and the delivery location of the hedge contract (eg a natural gas producer selling its product in Alberta, Canada will be exposed to basis risk if it hedges using Henry Hub futures contracts).

Product or Quality Basis Risk:arises from mismatches in type or quality of hedge and underlying asset (e.g. hedging gasoline with crude oil).

Calendar Basis Risk (or Spread Risk):arises from mismatches in the maturity of the hedge and underlying asset (e.g. hedging grain to be delivered in February with a March futures contract)

Basket Option

Option that provides a payoff dependent on the value of a portfolio of assets.

Benchmark

Criterion against which to measure the performance or riskiness of a position or portfolio

Bear Spread

Short position in a put option with a strike price X, combined with a long position in a put option with a strike price Y, where Y > X.

Beta

Measure of the systematic risk of an asset (ie the risk that cannot be diversified away). In the stock market, for example, the Beta of a stock is the degree to which a stock will move relative to a move in the underlying market

Bid/Ask (or Bid/Offer)

The bid is the price at which buyers are willing to buy, and the ask (or offer) is the price at which sellers are willing to sell. This is a useful measure of market liquidity, the more narrow the spread the higher the market liquidity.

Binomial Model

A model in which the price of an asset is monitored over successive short periods of time. In each time period it is assumed that only two price movements are possible.

Binomial Tree

A tree that represents how an asset price evolves under the binomial model

Bituminous Coal

Coal that has been metamorphosed to the state that it has coking properties due to the effects of time, pressure and temperature.

Black's Approximation

An approximate procedure developed by Fischer Black for evaluating a call option price on a dividend paying stock.

Black's ModelAn extension of the Black-Scholes model for evaluating European option prices on futures contracts.

Black Scholes Option Pricing ModelA model for calculating the theoretical value of options on stocks developed by Fischer Black, Myron Scholes and Robert Merton. The original model was used to price European options, it has since been adapted for American options.

BondLong term debt

British Thermal Unit (BTU)A measure used to compare the heat producing value of different fuels. Defined as the amount of heat required to raise the temperature of 1lb of water by one degree Fahrenheit (technically from 60 deg F to 61 def F).

Bulk DensityWeight per cubic metre

BullionGold or silver in bars or ingots

Bull SpreadLong position in a call option with a strike price X, combined with a short position in a call option with a strike price Y, where Y > X.

Butterfly SpreadLong position in a call option with a strike price X, long position in a call option with a strike price Z, combined with a short position in two call options with a strike price Y, where Z > Y > X, AND Y = 0.5(X+Z)

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