Chapter 7: Delivery and Settlement

Question 1

Where do Commodities for Futures Need to be Stored?

Answer 1

In warehouses approved by the CCP.

Question 2

What is an LME Warrant?

Answer 2

It is a reciept from a warehouse, that warrants the delivery of assets from a futures contract.

Question 3

What is the Purpose of LMEsword?

Why would this be used?

Answer 3

To allow parties to exchange LME warrants.

I.e. of the location of the warehouse is in a different country, and the companies needs the materials delivered from a closer one.

Question 4

What are the 3 Choices for the Buyer/long position of a Futures Contract?

Answer 4

• Close out
• Roll the position forward
• Proceed for delivery

Question 5

What is the EDSP?

Just the annogram.

Answer 5

Exchange delivery settlement price.

Question 6

What are the Delivery Methods for Futures?

Answer 6

• Contracts for Difference (CFDs) cash
• Physically delivered futures.

Question 7

What is the Equation for General Invoice Amount?

Answer 7

EDSP x No. Contracts x Contract Size

Question 8

What is the Equation for Bond Invoice Amount?

Answer 8

IA = (EDSP x Price Factor x Scaling Factor x No. Contracts) + Accrued Interest

Question 9

What is a Delivery Notice and Where is it Used?

Answer 9

The document that a short provides to its broker with its intention to deliver the futures securities.

Question 10

How Does the Clearing Member (CCP) Choose a Long to Exercise the Option, After Receving the Delivery Notice?

When the option is due to be exercised?

Answer 10

Randomly.

Question 11

What is the First Notice Day?

What does this mean for delivery?

Answer 11

The short is giving notice that they will make delivery, and this can be any date during the delivery month.

Question 12

What is the First Delivery Day?

Answer 12

This is the earliest day after the first notice day that a short can deliver the phsyical.

Question 13

What is the Last Delivery Day?

Answer 13

This is the last day that a short can deliver the physical.

Question 14

What is the Last Trading Day?

What does this mean for long / short futures?

Answer 14

This is the last chance to close out the option.

Question 15

When is the Last Day a Long Can Close Out Their Position to Guarantee they Will Not Have to Take Delivery?

You’re early?!

Answer 15

The day before the first notice day?

Question 16

What Choices does the Short Have?

When delivering (WWW?)

Answer 16

• When to give notice
• What to deliver
• When to deliver
• Where to deliver

Question 17

Who Has the Power with Options?

Holder of Writer?

Answer 17

Holder.

Question 18

What is an Exercise Notice?

When is this created?

Answer 18

An exercise notice is submited by the broker (on behalf of the client) to the CCP, that they would like to exercise their option.

Question 19

What is an Assignment Notice?

Answer 19

The CCP will submit and assignment notice at random to a writer, when an option is to be exercised.

Question 20

What is an Option Offset?

Answer 20

By exploiting a difference in premiums, i.e. Buying a call for 4p and selling the same call for 5p. Net 1p.

Question 21

Why Would an Option be Abandoned?

DUH!

Answer 21

If it is out-the-money.

Question 22

What is Automatic Exercise?

Obvious

Answer 22

A clearing house facility to automatically exercise, sufficiently ITM options on the last trading day.

Question 23

What is a Cabinet Trade?

Answer 23

Closing out a loss making position to crystalise a loss, and thus get tax advantages.

Question 24

How does One Stop Automatic Exercise?

Answer 24

Prevent by filing a suppresion notice with the clearing house.

Question 25

Taking into account offsetting position, as a contract approaches delivery, which type of margin is triggered?

Answer 25

Spot month margin

Question 26

What is an advantage of the automatic exercise system?

Answer 26

Reduced paperwork on expiry.

Question 27

What best describes the clearing house role when a future goes to delivery?

Answer 27

It manages the delivery of open contracts between clearing members.

Question 28

How does ICE futures ensure EDSP is appropriatley calculated?

What is expected of the exchange?

Answer 28

An exchange must use an openly declared mechanism that will prevent any price manipulation.

Question 29

For a bank which is heavily involved in derivatives trading, the role of checking positions for risk management purposes should be carried out?

Answer 29

Outside the dealing area.

Question 30

Who is responsible for managing delivery of open contracts at expiry?

Answer 30

The clearing house

Question 31

Why must trade details be independently ageed by the dealers involved?

Answer 31

To reduce the risk of fraud.

Question 32

If the term sheet attached to a deal ticket has been incorrectly processed, this could result in?

Answer 32

A hedge could appear as a speculative position.