Delivery and Settlement Flashcards
cabinet trade
close out loss making position, crystalising a loss
What position will the writer of a call on a future be in if the option is exercised?
ADelivery of the underlying asset BLong-future CShort-future DShort-put
Short-future,
Selling the right to buy a future will leave the writer of the option delivering the futures contract if the option is exercised against them.
A trader enters into a contract to buy 25 tonnes of lead at $890 per tonne in three months’ time on the London Metals Exchange (LME). If on the delivery the settlement price is calculated at $860 per tonne, how much will the trader pay for delivery of the contract?
A$22,250 B$21,875 C$21,500 D$750
$21,500,
The trader will pay $21,500 for delivery of the contract ($860 x 25 tonnes). The $860 will be used rather than the $890 as variation margin will have covered the difference.
The $860 will be referred to as EDSP (exchange delivery settlement price).
Taking into account offsetting position, as a contract approaches delivery, which of the following types of margin is triggered?
AIntra-day margin BSpot month margin CMaintenance margin DInitial margin
Spot month margin,
The best answer and most literal answer is spot month margin, as this is a margin which is specifically payable in the delivery month.
Which of the following would set the terms for automatic exercise of a specific contract?
AClearing member BBroker CExchange DClearing house
Exchange,
The option must be ITM by a certain amount which is determined by the relevant exchange in the contract specification.
Which might be a reason that the buyer and the seller of a derivatives trade use alternative delivery procedures?
ABoth parties do not have enough confidence in the clearing house delivery terms and conditions BThe buyer is not comfortable with the clearing house delivery terms and conditions CBoth parties are not comfortable with the clearing house delivery terms and conditions DThe seller is not comfortable with the clearing house delivery terms and conditions
Both parties are not comfortable with the clearing house delivery terms and conditions,
All ADP agreements MUST be agreed by both the seller and buyer. Both parties must advise the clearing house of their agreement. The clearing house will then liquidate the contracts at the agreed settlement price, in fulfilment of all its obligations under the delivery contract. Only certain contracts will permit this facility set by the exchange.
what are Spot month charges
to cover a potential increase in volatility as the contract approaches expiry.,
reflect increasing cost associated with a contract that needs to be delivered upon expiry
what are intermonth charges
these are for intramarket spreads, e.g. long a June tin contract and short a September tin contract.
what is scanning risk
will be set by looking at the recent price volatility of the contract.
