The clearing house will determine WHO to deliver but will not tell you any name. They will tell you WHERE to deliver. It is my job
Nov 2013 FRM Level 1 feedback
- Thread starter Maiyaa
- Start date
Sabit Rahimov
Member
Hi,
In the Exchange traded market, in most case the both party in the transactions doesn't know each other. Loosely speaking, let say you are long position in futures contract and after a three month you took the short position on that futures and closed your position. So, while you have closed your position by taking opposite (short) to the initial long position, certainly there is a party who bought (long position) the futures you sold. Consequently, system works in such manner in the Clearing House.
Furthermore, until the delivery month, the specific futures contract can be many times traded by different parties. Therefore, in order not to observe taking delivery, the party in the short position must close his position. Otherwise, if the party has an intention to delivery, accordingly send notice of intention to deliver to the Clearinghouse and of course now clearinghouse define as per their own procedures the party in the long position who must accept delivery.
In regard to delivery location, for each commodity futures defined by exchange a number of delivery options. for instance below I inserted the extraction from the real crude oil futures contracts which specify delivery locations and terms:
"Delivery shall be made free-on-board ("F.O.B.") at any pipeline or storage facility in Cushing, Oklahoma with pipeline access to Enterprise, Cushing storage or Enbridge, Cushing storage. Delivery shall be made in accordance with all applicable Federal executive orders and all applicable Federal, State and local laws and regulations.
At buyer's option, delivery shall be made by any of the following methods: (1) by interfacility transfer ("pumpover") into a designated pipeline or storage facility with access to seller's incoming pipeline or storage facility; (2) by in-line (or in-system) transfer, or book-out of title to the buyer; or (3) if the seller agrees to such transfer and if the facility used by the seller allows for such transfer, without physical movement of product, by in-tank transfer of title to the buyer."
Hope I was able to clarify!
Thank you!
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Sabit Rahimov
Member
Thank you![/quote]
Then how the seller invoice the amount to be paid by the buyer if the buyer unknown???!!! It looks illogical.
Then how the seller invoice the amount to be paid by the buyer if the buyer unknown???!!! It looks illogical.
hi
I selected where to deliver as answer since I basically speaking did not remember the specific reference on my preparation material, so that I used my logic:
I believe that the reasoning of Sabit is really articulated, I personally apreciate it, but my doubt is only on the question's wording
In my view the short has to be informed with legal principles of reasonable care and good faith, so that his name should surely not be communicated to an anonymous third party, for me it sounds more logical to protect his privacy with the place to delivery indication to the seller of the contract by the clearinghouse, that nets the positions at the end of the last trading day
If you end your sentence with "it is my job" am I expected to be at least 99 percent sure that it is where to deliver the right option kindly?
Thank you for comprehension and contribution
Maiyaa
New Member
Agree on the number of contracts question given index beta. There was only one correct answer which made it tad easy
Hum.... i saw in:
McDonald, Commodity Forwards and Futures &
Geman, Fundamentals of Commodity Spot and
Futures Markets
"An Exchange For Physicals is an agreement between a party holding a long Futures position and a party with an
equal size short position to enter a bilateral contract specifying the terms of physical delivery
(location and price)."
They don´t say anything about "who".
McDonald, Commodity Forwards and Futures &
Geman, Fundamentals of Commodity Spot and
Futures Markets
"An Exchange For Physicals is an agreement between a party holding a long Futures position and a party with an
equal size short position to enter a bilateral contract specifying the terms of physical delivery
(location and price)."
They don´t say anything about "who".
Maiyaa
New Member
Also the wiki link(http://en.wikipedia.org/wiki/Pricing_point) confirms that WHERE (Delivery point) is part of the contract.
"In a futures contract where the underlying is a physical object, such as grain or oil, the price of the futures contract is quoted assuming delivery of that physical object to a specific physical location in the world.[1] For instance, natural gas futures in the United States usually have the Henry Hub as a delivery point,[2] and gold may have a delivery point of New York or London. Futures contracts that differ only in the delivery point will typically have slightly different prices, reflecting localized supply and demand and transportation costs.[citation needed] "
"In a futures contract where the underlying is a physical object, such as grain or oil, the price of the futures contract is quoted assuming delivery of that physical object to a specific physical location in the world.[1] For instance, natural gas futures in the United States usually have the Henry Hub as a delivery point,[2] and gold may have a delivery point of New York or London. Futures contracts that differ only in the delivery point will typically have slightly different prices, reflecting localized supply and demand and transportation costs.[citation needed] "
yes in facts futures are not forwards where you are sure to have exactly one counterparty
That is the reason why also for reasonable care I assumed that the place to deliver should be the safest way for the clearinghouse to arrange delivery, so that it communicates to the seller where to deliver but I still did not find any reference in my preparation material
Thank you
That is the reason why also for reasonable care I assumed that the place to deliver should be the safest way for the clearinghouse to arrange delivery, so that it communicates to the seller where to deliver but I still did not find any reference in my preparation material
Thank you
An option strategy when you expect little volatility... answer is indeed short straddle.
If you remember correctly, a straddle will be in the money when there is a large movement either up or down... Thus a straddle will have a lot of value when the volatility is high... the inverse will be the case for a short straddle.
If you remember correctly, a straddle will be in the money when there is a large movement either up or down... Thus a straddle will have a lot of value when the volatility is high... the inverse will be the case for a short straddle.
Sabit Rahimov
Member
The party in the short position chooses what quality/when to deliver/where to deliver as per contract specified by the exchange!!! Strongly encourage you to look at real futures contract designed by exchange (e.g CME groups corn futures ) and read carefully procedure on delivery.
If the contract defined by exchange specify a number of option in regard to quality of the commodity and where to deliver, then short position has ultimate right to choose one of them.
Even contract shows price adjustment in terms of delivery options!!!
That is the idea!
P.S I dont care about who works in that area except for CME group
) different exchange might have different arrangements. Topics covered by frm assumes USA futures exchange!!!
If the contract defined by exchange specify a number of option in regard to quality of the commodity and where to deliver, then short position has ultimate right to choose one of them.
Even contract shows price adjustment in terms of delivery options!!!
That is the idea!
P.S I dont care about who works in that area except for CME group
) different exchange might have different arrangements. Topics covered by frm assumes USA futures exchange!!!
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Sabit Rahimov
Member
reference to the guys who persist in their answers, specifically "Where to deliver".
http://www.wipro.com/Documents/resource-center/library/Clearing_House_Functions.pdf
Meanwhile, I stop the comments on this question.
http://www.wipro.com/Documents/resource-center/library/Clearing_House_Functions.pdf
Meanwhile, I stop the comments on this question.
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Sabit Rahimov
Member
Yeah, short straddle is good strategy for non volitile market. That is correct answ.
but the long butterfly spread is also recommended as a low volatility strategy...
Sabit Rahimov
Member
In the exchange for Physical arrangenment, the parties privately negotiate the terms of the delivery and then inform the clearinghouse about. Obviously parties know each other. But, the question in the frm exam doesnt assume exchange for physical.
Sabit Rahimov
Member
that is also true. But I dont think that answer appeared there.
Sabit Rahimov
Member
It is clear that the short straddle is risky strategy in the real market and can yield hypothetically unlimited loss. But the question assumed to choose strategy for non volitile market!
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