Desk Glossary

The language of a trading desk, defined plainly. Free at every level.

36 terms

CIF: Cost, Insurance and Freight. The seller arranges shipping and insurance to the destination port. The quoted price therefore is not comparable to an FOB price without adjustment.
FFA: A derivative used to hedge freight rates. Relevant to any arbitrage whose economics depend on shipping cost.
FOB: Free On Board. The seller’s responsibility ends once the cargo is loaded. The buyer arranges and pays for freight and insurance, and carries the risk at sea.
Incoterms: Standard trade terms such as FOB and CIF that define exactly when risk and title pass from seller to buyer. They decide who owns the problem when something goes wrong.
VaR: Value at Risk. An estimate of the loss a book could suffer over a given period at a given confidence level. Useful as a limit, dangerous as a promise.
arbitrage: Buying in one place and selling in another where the price is higher by more than the cost of moving it. In commodities the arb is rarely riskless: the freight, the timing and the quality spec all have to hold.
backwardation: The opposite of contango: forward prices below spot. The market is paying you to deliver now, which usually means someone is short of the physical product.
basis: The difference between the price of a physical cargo at a given location and the futures contract used to hedge it. Physical traders are, in effect, basis traders.
benchmark: A reference price such as Brent, WTI or Dubai against which physical cargoes are priced. Few people want the benchmark grade itself.
bill of lading: The document issued by the carrier that acts as receipt for the cargo, evidence of the contract of carriage, and document of title. Whoever holds it controls the goods.
boil-off: The portion of an LNG cargo that evaporates in transit. It makes distance a direct cost rather than just a freight rate.
borrowing base: The value of inventory and receivables a lender will advance against. It often constrains how much business a desk can write more than capital does.
cargo: A specific parcel of a physical commodity, sold as a unit under one contract. Not a quantity so much as a thing with a vessel, a delivery window and a set of documents attached.
charterparty: The contract between a cargo owner and a shipowner for the use of a vessel. Its clauses on laytime and demurrage often matter more than the headline freight rate.
concentrate: Partially processed ore, the form in which most metals are actually traded between miner and smelter.
contango: When forward prices sit above the spot price. It pays to store the commodity and sell it later, which is what makes storage a trade rather than a cost.
counterparty risk: The risk that the other side of a trade does not perform. In physical trading this usually means not paying for a cargo already shipped.
crack spread: The margin between crude oil and the refined products made from it. It can be traded directly without owning a refinery.
demurrage: What the charterer pays the shipowner when loading or discharge takes longer than the contract allows. A slow terminal can quietly eat the margin on a deal.
destination flexibility: A contract term allowing an LNG cargo to be diverted to whichever market pays most. It is what turned LNG from a regional business into a traded one.
differential: The premium or discount of a specific grade or location against a benchmark. This, rather than the benchmark itself, is what most physical cargoes actually trade on.
flat price: The outright price of a commodity, as opposed to a spread or differential. Physical traders usually hedge this exposure away deliberately.
forward curve: The set of prices for delivery at successive future dates. Its shape tells you what the market believes about supply, demand and the value of storage.
inspector: The independent party whose measurement of quantity and quality at load or discharge is binding on both buyer and seller.
lay-can: The window during which a vessel must arrive to load or discharge. Miss it and the counterparty may cancel or charge you for the delay.
laytime: The time allowed for loading or discharging a cargo before demurrage begins to accrue.
letter of credit: A bank’s promise to pay the seller once conforming documents are presented. The bank judges the documents, not the cargo, which is why small discrepancies stop payment.
letter of indemnity: A promise given when a cargo arrives before its documents, allowing discharge to proceed. It transfers real risk to whoever signs it.
line-up: The schedule of vessels expected at a terminal. Reading line-ups is one of the oldest forms of market intelligence.
margin call: A demand for additional cash to cover an adverse move on a derivatives position. Timing mismatches between margin and physical settlement are a genuine solvency risk.
mark to market: Revaluing a position at current market prices. It converts an unrealised loss into a cash margin call, which is how hedged firms run out of money.
nomination: The formal notice naming the vessel, volume and dates for a shipment. Getting one wrong is the classic junior mistake, and an expensive one.
position: The net exposure a desk holds, physical and paper combined. Disagreement between systems about what the position is remains one of the industry’s most common problems.
stock and flow: The distinction between inventory held and volume moving. Prices respond to both, and confusing them is a reliable way to misread a market.
trade finance: The banking that lets a firm buy a cargo worth more than it holds in cash, usually through a letter of credit against the shipping documents.
treatment charge: The fee a smelter earns for turning concentrate into metal. When smelting capacity is tight the charge falls and value moves back to the miner.