Chapter 7: Delivery and Settlement Flashcards
What are the 3 options the owner of a future has?
Hold to delivery
Close out contract before settlement
Roll over the contract
The owner of a future can close out the position early as they are fungible through sending a close-out instruction. What are the 4 types of close-out instructions?
First-in, first-out - close out oldest long position against longest short position
Last-in, first-out - most recent trades versus oldest
Maximum profit - close out equal number of long and shorts to realise max profits
Maximum loss - close out equal number of short and longs - will release build up of credit risk
What is another name for a position that has been completely close out and ceases to exist?
Flat
Can an incorrectly closed out item by re-opened?
Yes, through busting the settlement.
What iOS the formula to calculate the profit and loss on an open equity index futures position?
Profit (or loss) = no. of ticks x tick value x no. of contracts
What is LMEsword?
Electronic transfer system for LME warrants acting as a depository holding details and allowing instantaneous exchange of warrants.
What is the Exchange Delivery Settlement Price (EDSP)?
EDSP is the price at the end of the day for physically settled derivatives (as defined by ICE).
What is tendering, first and last delivery day in relation to physical delivery?
Tendering is the period the seller of a commodity has to provide physical delivery. On some longer contracts there is a final days notice.
For futures buyers who opt for physical delivery (do not close out future before first notice day), what is the invoice amount?
Invoice amount = EDSP x scale factor x no. of contracts
What is the invoice amount for bond futures that must be delivered?
Invoice amount = (EDSP X price factor x scale factor x no. of contracts) + accrued interest
How would cash settlement be closed?
Last day variation margin would be paid against the EDSP.
Some market participants might manipulate EDSP, how and why?
To ensure favourable cash settlement. This is done through purchasing the securities in the appropriate market.
Why is EDSP important in physical delivery as well as in cash delivery?
In physical delivery, the EDSP is used to calculate the variation margin.
How to calculate profit when exercising options?
Profit = EDSP - strike x value per point
What is a cabinet trade?
In options, when ATM or barely ITM, a trader may close-out the trade as there is not profit to be made after transaction costs are considered. This is a cabinet trades as losses are crystallised for accounting purposes.
