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You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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Crack Spread
The differential between the price of crude oil and refined petroleum products, such as gasoline and distillate fuel oil, that are made from that crude oil in the refining process. The name is derived from the industrial process of “cracking” crude oil into its constituent products. The spread is basically a gross processing margin for the refiner.
The most popular versions are the 3-2-1 crack spread (3 barrels of crude are split into 2 barrels of gasoline and 1 barrel of distillate), and the simpler 1-1 spread. These are actively traded on futures exchanges where refiners can hedge margins and traders can go short or long on refining economics.
When demand for products is high, compared to crude supply, the crack spreads widen, and when crude prices rise faster than products, the crack spreads compress.
Example: A refinery with a buy agreement on crude oil with a fixed price is concerned about the rise in the gasoline crack spread during the summer driving season. The refinery has already pre-hedged its margin through futures contracts weeks ago and is thus getting an unusually high processing spread, benefiting from the product/crude price spread before the physical barrels are processed.
Crater
Market slang for a swift and sudden price fall, usually disorderly. When a market or individual security craters, it doesn’t drift lower. It falls off a cliff. The word connotes both the swiftness and severity of the move, and implies the damage is structural rather than temporary. Crater scars.
Craters are when the underlying premise for a price collapses. A company misses earnings badly and the growth story is over. Breaking a currency peg. One-night excess of commodity supply. In each case, the buyers who were supporting the price all disappear at once, and without a bid, the decline is rapid.
Technical traders will identify a crater vs a normal pullback by the character of the move. Lots of volume, candles that are too wide. A series of down days with little recovery and a break of multiple support levels on the way down, without a meaningful pause. The recovery of a real crater is often far longer than intuition would suggest.
Example: A biotech stock is trading at $40 a share when its lead drug flunks a late-stage clinical trial overnight, and the stock drops to $8. A single regulatory headline can kill the entire investment thesis. Years of pipeline expectations baked into the stock. The bid is immediately withdrawn. That is the face of a crater.
Credit Rating
A standard evaluation of a borrower (such as a company, sovereign government, municipality, or any type of financial instrument that is combined and structured in a particular way). The ratings are based on a scale from AAA (highest rating) down through investment-grade ratings to speculative (BBB/Baa and below), finally to default (D).
A credit rating is a statement of the likelihood that a borrower will be able to pay their debts. The higher the rating, the lower the perceived risk and borrowing cost. When the rating is downgraded from “investment grade” to “junk,” many institutional investors are forced to sell under their investment mandates, significantly magnifying the price impact far beyond that of the fundamental change that prompted the downgrade.
Ratings are based on a subjective assessment only, not a guarantee.
Example: A company with a BBB rating is downgraded to BB+ and moves from investment grade to junk. This will force index funds and insurance firms, whose asset managers are required to only purchase investment-grade bonds, to sell. Before there’s any fundamental weakening of the company’s business, its bond price drops drastically, and its cost of new borrowing goes up significantly.
Credit Rating Agency
An organization that rates and issues credit ratings for borrowers and debt instruments. The Big Three, Moody’s, S&P Global Ratings, and Fitch, dominate the global market with most of the market share. Most of the major economies have regional agencies: CRISIL in India, DBRS in Canada, and Scope in Europe.
The rating agencies make money primarily from the issuers that they rate, and these issuers pay for the rating. There is also an obvious conflict of interest: agencies have a financial interest in satisfying their clients, who they wish to keep doing business with. Even after a series of regulatory changes following the crisis in 2008, the conflict is widely recognized and largely unresolved.
Structural power is in the rating. There are numerous institutional requirements that allow only investment-grade holdings. The borrowing costs of a country are directly related to its sovereign ratings.
Example: A sovereign government that wants to issue world debt bonds approaches the Big Three for ratings. An investment-grade rating opens the paper to pension funds and insurers that are not allowed to invest in sub-investment-grade debt. A speculative grade rating would entail materially higher yields to attract the smaller number of eligible buyers who might take the additional credit risk.
Croatian Kuna (HRK)
Croatia’s old currency, which was discontinued in 2000 after the country joined the eurozone. The kuna, or “marten” in Croatian (referring to the fur-bearing animal that was traded), was issued by the Croatian National Bank and was broken down into 100 lipa.
It was a managed float, and the central bank had a relatively stable EUR/HRK exchange rate throughout its history, which is indicative of Croatia’s close economic ties with the eurozone and the fact that real estate and tourism contracts were already in euros. This de facto euroization necessitated a de jure currency change as a logical follow-up to the current economic situation.
The kuna is no longer a circulating currency, and there is no functioning exchange market. The conversion of residual holdings is possible at the central bank at the irrevocably fixed conversion rate at eurozone entry.
Example: A tourism company based in Croatia used to have a rate of, say, $120 per night in euros and kept books in kuna, well before the official changeover. All prices and contracts already written in euros did not need to be adjusted; only those in kuna had to be changed according to the fixed and established official conversion rate when the euro was introduced.
Cross Rate
A rate between two currencies that is not USD-based, but rather derived by calculating each currency’s rate by the USD and adding them. Usually, currency pairs are traded directly, but in less liquid currency pairs, the cross rate is calculated by converting the rate via USD.
If EUR/USD is 1.08 and USD/JPY is 150, the EUR/JPY cross rate is 1.08 × 150 = 162. It is a mechanical calculation, but it is a reality that EUR/JPY will move when EUR/USD or USD/JPY moves, even if there is no news to it.
When a calculated cross rate differs from the actual traded rate, algorithmic traders take advantage of it and exploit the opportunity until the rate is equalized, thus the opportunity is eliminated. In reality, there’s a negligible and transient divergence, an illustration of how effective the arbitrage process is between the interwoven FX markets.
Example: A European company paying a Japanese supplier requires EUR/JPY. It is a mechanically derived rate based on EUR/USD and USD/JPY, extremely liquid currency pairs with tight spreads. The cross is calculated and settled in seconds and is based on the relative value of euros and yen through their relationships with dollars.
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