Posted in Finance, Accounting and Economics Terms, Total Reads: 222
Definition: Call Rule
Call rule id used in future exchange markets. It is the rule followed to decide on the official bidding price of the cash commodity after the market closing i.e. at the end of the trading day and before the market opening i.e. before the opening of the exchange on the next trading day. A cash commodity is a product being traded on or is behind a futures contract.
This call rule guideline endeavours to reduce overnight volatility and instability by ensuring stock prices commence trading near the precedent day's closing bid.
History of call rule: The Chicago Board introduced and adopted this rule in 1906. Before this rule was introduced, secret bids which favoured small traders used to take place overnight. This used to change the opening price the next day. Thus to avoid this, call rule was instituted.
For example: if you buy a futures contract for corn, there is an actual load of corn somewhere that is going to be delivered when the contract is exercised. This load of corn is bid for Rs 100 (let’s say) on Monday. So next day, the opening price of the same amount or corn would be Rs 100 only as per the call rule. It may change as the day proceeds but will start from this opening price only on Tuesday.