Word of the DayWelcome to Investmenterms.com, a comprehensive dictionary for commodity futures traders.
Analysis of Variance
A statistical analysis tool that separates the total variability found within a dataset into two components, random and systematic factors. The random factors do not have any statistical influence on the given dataset, while the systematic factors do. The ANOVA test is used to determine the impact independent variables have on the dependent variable in a regression analysis. The ANOVA test is the initial step in identifying factors that are influencing a given data set. After the ANOVA test is performed, the analyst is able to perform further analysis on the systematic factors that are statistically contributing to the data set's variability. ANOVA test results can then be used in an F-test on the significance of the regression formula overall.
Commission
Fee charged by a broker for executing an order.
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.
Option Pricing Model
A mathematical model used to calculate the theoretical value of an option. Inputs to option pricing models typically include the price of the underlying instrument, the option strike price, the time remaining till the expiration date, the volatility of the underlying instrument, and the risk-free interest rate (e.g., the Treasury bill interest rate). Examples of option pricing models include Black-Scholes and Cox-Ross-Rubinstein.
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.
American Style Option
An option which may be declared on any day prior to expiration, with the underlying being transferred as a spot transaction for cash.