Chapter 7: Delivery and Settlement Flashcards
Where do Commodities for Futures Need to be Stored?
In warehouses approved by the CCP.
What is an LME Warrant?
It is a reciept from a warehouse, that warrants the delivery of assets from a futures contract.
What is the Purpose of LMEsword?
Why would this be used?
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.
What are the 3 Choices for the Buyer/long position of a Futures Contract?
- Close out
- Roll the position forward
- Proceed for delivery
What is the EDSP?
Just the annogram.
Exchange delivery settlement price.
What are the Delivery Methods for Futures?
- Contracts for Difference (CFDs) cash
- Physically delivered futures.
What is the Equation for General Invoice Amount?
EDSP x No. Contracts x Contract Size
What is the Equation for Bond Invoice Amount?
IA = (EDSP x Price Factor x Scaling Factor x No. Contracts) + Accrued Interest
What is a Delivery Notice and Where is it Used?
The document that a short provides to its broker with its intention to deliver the futures securities.
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?
Randomly.
What is the First Notice Day?
What does this mean for delivery?
The short is giving notice that they will make delivery, and this can be any date during the delivery month.
What is the First Delivery Day?
This is the earliest day after the first notice day that a short can deliver the phsyical.
What is the Last Delivery Day?
This is the last day that a short can deliver the physical.
What is the Last Trading Day?
What does this mean for long / short futures?
This is the last chance to close out the option.
When is the Last Day a Long Can Close Out Their Position to Guarantee they Will Not Have to Take Delivery?
You’re early?!
The day before the first notice day?
What Choices does the Short Have?
When delivering (WWW?)
- When to give notice
- What to deliver
- When to deliver
- Where to deliver
Who Has the Power with Options?
Holder of Writer?
Holder.
What is an Exercise Notice?
When is this created?
An exercise notice is submited by the broker (on behalf of the client) to the CCP, that they would like to exercise their option.
What is an Assignment Notice?
The CCP will submit and assignment notice at random to a writer, when an option is to be exercised.
What is an Option Offset?
By exploiting a difference in premiums, i.e. Buying a call for 4p and selling the same call for 5p. Net 1p.
Why Would an Option be Abandoned?
DUH!
If it is out-the-money.
What is Automatic Exercise?
Obvious
A clearing house facility to automatically exercise, sufficiently ITM options on the last trading day.
What is a Cabinet Trade?
Closing out a loss making position to crystalise a loss, and thus get tax advantages.
How does One Stop Automatic Exercise?
Prevent by filing a suppresion notice with the clearing house.
Taking into account offsetting position, as a contract approaches delivery, which type of margin is triggered?
Spot month margin
What is an advantage of the automatic exercise system?
Reduced paperwork on expiry.
What best describes the clearing house role when a future goes to delivery?
It manages the delivery of open contracts between clearing members.
How does ICE futures ensure EDSP is appropriatley calculated?
What is expected of the exchange?
An exchange must use an openly declared mechanism that will prevent any price manipulation.
For a bank which is heavily involved in derivatives trading, the role of checking positions for risk management purposes should be carried out?
Outside the dealing area.
Who is responsible for managing delivery of open contracts at expiry?
The clearing house
Why must trade details be independently ageed by the dealers involved?
To reduce the risk of fraud.
If the term sheet attached to a deal ticket has been incorrectly processed, this could result in?
A hedge could appear as a speculative position.
