Delivery and settlement

Question 1

Commodity contracts

Answer 1

- Approved warehouse
• Global
- Warehouse receipt
• LME warrant
- Proof of ownership
• LMEsword
- Secure recording and transfer of warrants

Question 2

Closing contracts

Answer 2

Three choices to a buyer/long position of futures

• To close out
• To roll the position forward
• To proceed to delivery

Question 3

Alternative Delivery Procedure (ADP)

Answer 3

Delivery other than specified in the exchange’s rules and regulations
• Both buyer and seller advise the clearing house of their agreement
• Clearing house will then liquidate the contracts at the agreed settlement price
• Exclusive to commodity contracts
• Accepted by major exchanges such as ICE and CME

Question 4

Physical delivery or cash settled

Answer 4

• Exchange delivery settlement price (EDSP)
• Delivery methods
- Contracts for differences (CFDs)
- Physically delivered futures

Question 5

Invoice amount:

Answer 5

Invoice amount = EDSP x Number of contracts x Contract size
Invoice amount (bonds) = EDSP x Price factor x Scaling factor x Contract size + accrued interest

Question 6

Futures delivery and settlement

Answer 6

1. Inform broker (clearing member) of intention to deliver short who then gives a delivery notice to a central counterparty who chooses a long.
2. The CCP then acts as an intermediary transferring the invoice amount and the assets.

Question 7

Physical delivery

Answer 7

Timetable for delivery
• E.g. ICE Futures Europe long gilt future
If there are choices about delivery, the short has the choices:
- When to give notice
- When to deliver
- What to deliver
- Where to deliver

Question 8

Exercise

Answer 8

Holder of a call option informs their broker of intention to exercise BROKER (Clearing member of CCP) sends exercise notice to CCP.
CCP chooses a writer and sends an assignment notice
Upon receipt of assignment notice the writer delivers the stock to CCP and receives the strike price, whilst the holder pays the strike to CCP and receives the stock.

Question 9

Automatic exercise

Answer 9

A clearing house facility to exercise ITM options automatically on the last trading
day
• Conditions set by the exchange
• Prevent by filing suppression notice with the clearing house