Disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
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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Country risk
The overall risk of investing in a country, including all that can go wrong at the level of the sovereign, including political instability, policy reversals, currency controls, expropriation, civil unrest, weak rule of law, and the risk that the government itself fails to service its debt. Country risk is not a replacement for company analysis, but it is in addition to it.
It shows up in pricing in the form of the sovereign spread, the difference between the yields on a country’s government bonds and those on US Treasury bonds of the same maturity. The wider the spread, the more investors need to be compensated for the extra risk. Sovereign ratings formalise this assessment, and credit rating agencies assign them, although markets often price risk ahead of rating changes.
Emerging markets investors obsess about tracking country risk. An election result, a court ruling or the appointment of a central bank governor can reprice an entire asset class overnight. It is a universal phenomenon which developed market investors forget until a crisis reminds them.
Example: An investor who holds Argentine bonds denominated in dollars earns a higher yield than on comparable US Treasuries. That yield premium is the price the market pays for Argentina’s history of defaults, currency controls and policy unpredictability. The extra return is nothing more and nothing less than compensation for country risk.
Cover On A Bounce
A short-selling instruction definition: If a declining asset temporarily rebounds from an oversold position, then use that rebound to close (cover) the short position at a more advantageous price than the asset is currently at. The bounce offers liquidity, and the exit is much better than making a buy into the bottom, as the buying pressure can be strong and fills are poor.
Covering on a bounce is a practical trading management. A short seller who waits for absolute lows may end up either getting out completely or getting caught in a short squeeze. A small bounce also gives liquidity, minimizes slippage, and helps to get out of the trade before a permanent break in sentiment occurs.
The course is eminently popular with risk managers who wish to limit their exposure, but aren’t interested in absolute accuracy in timing.
Example: A trader is short an oil stock that has fallen 30% over several weeks. On good news of the sector, the stock springs 5%. Instead of waiting for a lower low, the trader cashes in the short during the bounce, thus capturing the lion’s share of the profit while the stock is still temporarily liquid, and there are natural buyers in the market.
Cover On Approach
A risk management instruction to close a short position before a major level of price that is either a support zone or a prior major low that is well watched or that the price is approaching, but not to wait to see if the price breaks or holds the level.
The logic is asymmetric risk management. When the price gets close to a major support level and remains there, the short-term has a chance of a violent reversal. When big support occurs, and then it turns into a short covering rally, it can be extremely quick and hard. The short seller will take less of the profit on the approach but will have a guarantee on execution, as well as protection from the worst possible scenario of a reversal.
Most useful in fast-moving markets where the distance between making contact with a level and breaking it is small enough that you cannot respond to it later.
Example: A trader shorts a stock index and watches a major multi-year support level come into range. Instead of waiting and seeing if it will break, the risk manager tells the desk to cover before it gets to the level to test. Some loss of profit is incurred if the level breaks. When it does, and the market moves higher, it prevents any negative short-covering rally.
CPA Franc
A currency that is used in two monetary unions in sub-Saharan Africa. Senegal and Côte d’Ivoire are part of the West African Economic and Monetary Union (WAEMU) with eight other countries that use the CFA franc (XOF). The Central African CFA franc (XAF) is used by six countries in the CEMAC zone (Cameroon, Gabon, etc.). Both are regulated by regional central banks under the supervision of the French Treasury.
Both the francs are pegged at fixed rates to the euro, and France guarantees unlimited convertibility. This provides exchange-rate stability and inflation anchoring but takes away independent monetary policy from 14 countries. The critics say it’s a continuation of financial dependency, while supporters note the credibility and the discipline of inflation it brings.
Since the inception of the arrangement, francophone Africa has been debating the issue of monetary sovereignty.
Example: If a cocoa exporter in Senegal sells his product in euros, there is no risk of conversion: the value of the XOF in relation to the EUR is fixed, and the income in CFA francs is therefore always known when the prices of foreign currencies fluctuate. The peg essentially delegates exchange-rate management to the ECB and the French treasury, giving stability in exchange rates at the expense of French monetary flexibility.
CPI (Consumer Price Index)
A measure of the average change over time in the prices paid by consumers for a fixed basket of goods and services such as food, housing, transport, healthcare, clothing and more. Statistical agencies survey prices in thousands of stores, weight each category by its share of typical household spending, and publish the outcome monthly. The year-on-year change is what most people refer to as the inflation rate.
CPI is the one data release that moves the market in most economies. This is the central benchmark for central banks in their inflation mandates. CPI prints above target, raising expectations of rate increases. Ease bets build as it falls back toward the target. Minutes after a CPI release, bond yields, currencies, equity valuations and commodity prices all adjust.
Central bankers tend to focus more on core CPI, which excludes food and energy, because it is a better gauge of persistent inflation rather than temporary supply shocks.
Example: When a country’s CPI prints well above the central bank’s 2% target for several months in a row, short-dated government bond yields spike as traders reprice the likely path of interest rates. The sell-off typically hits equity markets, especially high-growth sectors that are sensitive to discount rates. One number immediately affects the pricing of almost every asset class.
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.
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