ch 7 Delivery & Settlement Flashcards
What is the role of the central counterparty (CCP) in delivery and settlement?
The CCP acts as an intermediary, ensuring trade performance and reducing counterparty risk in derivatives markets.
How are commodity contracts delivered?
Commodity contracts are delivered via exchange-approved warehouses, with ownership proven through warehouse receipts or LME warrants.
What are the three choices for a buyer/long position in a futures contract?
1) Close out the position, 2) Roll the position forward, 3) Proceed to delivery.
What is the Exchange Delivery Settlement Price (EDSP)?
The EDSP is based on the spot price of the underlying asset at expiry and ensures price convergence.
What are the two primary methods of futures settlement?
1) Cash settlement via Contracts for Differences (CFDs), 2) Physical delivery of the asset.
What is the cheapest-to-deliver (CTD) bond in bond futures?
The CTD bond is the bond that minimizes the cost of delivery for the short position.
How is the invoice amount calculated for physically delivered futures?
Invoice Amount = EDSP × Number of Contracts × Contract Size + Accrued Interest.
Who determines the Exchange Delivery Settlement Price (EDSP)?
The exchange calculates the EDSP, but the clearing house determines the invoice amount.
What happens when an investor goes long on a physically settled stock future?
The investor must pay the EDSP times the contract size at expiry to take delivery of the shares.
How does delivery occur in physically settled futures?
1) The short informs the clearing house via a delivery notice, 2) The CCP assigns the delivery to a long position, 3) The long pays the invoice amount and receives the asset.
What happens if a long futures position wants to avoid delivery?
The investor must close out the position before the first notice day to avoid assignment.
Who decides when and where to deliver in physically settled futures?
The short position holder has discretion over when, where, and what quality of the asset to deliver within contract terms.
What is the role of a delivery notice?
The delivery notice (or tender notice) informs the clearing house of a seller’s intention to deliver the underlying asset.
What is the first notice day in futures delivery?
The first day a short position can issue a delivery notice to the clearing house.
What is the last notice day in futures delivery?
The final day a short position can issue a delivery notice before contract expiry.
What is the delivery month in a futures contract?
The designated month when delivery must take place, with specific notice and expiry dates.
What are the main exercise styles for options?
1) European – exercised only at expiry, 2) American – exercised anytime before expiry, 3) Bermudan – exercised at specific dates.
How does exercising an option work?
1) The option holder informs their broker, 2) The broker submits an exercise notice, 3) The CCP assigns a counterparty to fulfill the contract.
What are the two settlement methods for options?
1) Physical settlement – the underlying asset is transferred, 2) Cash settlement – the intrinsic value is paid instead of delivery.
What are options on futures?
Options where the underlying asset is a futures contract instead of a stock or commodity.
