Chapter 34: Futures and Futures Options 659 
is charged for storage. His broker makes the actual arrangements. Futures contracts 
cannot be assigned at any time during their life, as options can. Rather, there is a 
short period of time before they expire during which one can take delivery. This is 
generally a 4- to 6-week period and is called the "notice period" - the time during 
which one can be notified to accept delivery. The first day upon which the futures 
contract may be assigned is called the "first notice day," for logical reasons. 
Speculators close out their positions before the first notice day, leaving the rest of the 
trading up to the hedgers. Such considerations are not necessary for cash-based 
futures contracts (the index futures), since there is no physical commodity involved. 
It is always possible to make a mistake, of course, and receive an assignment 
when you didn't intend to. Your broker will normally be able to reverse the trade for 
you, but it will cost you the warehouse fees and generally at least one commission. 
The terms of the futures contract specify exactly what quantity of the commod­
ity must be delivered, and also specify what form it must be in. Normally this is 
straightforward, as is the case with gold futures: That contract calls for delivery of 100 
troy ounces of gold that is at least 0.995 fine, cast either in one bar or in three one­
kilogram bars. 
However, in some cases, the commodity necessary for delivery is more compli­
cated, as is the case with Treasury bond futures. The futures contract is stated in 
terms of a nominal 8% interest rate. However, at any time, it is likely that the pre­
vailing interest rate for long-term Treasury bonds will not be 8%. Therefore, the 
delivery terms of the futures contract allow for delivery of bonds with other interest 
rates. 
Notice that the delivery is at the seller's option. Thus, if one is short the futures 
and doesn't realize that first notice day has passed, he has no problem, for delivery is 
under his control. It is only those traders holding long futures who may receive a sur­
prise delivery notice. 
One must be familiar with the specific terms of the contract and its methods of 
delivery if he expects to deal in the physical commodity. Such details on each futures 
contract are readily available from both the exchange and one's broker. However, 
most futures traders never receive or deliver the physical commodity; they close out 
their futures contracts before the time at which they can be called upon to make 
delivery. 
PRICING OF FUTURES 
It is beyond the scope of this book to describe futures arbitrage versus the cash com­
modity. Suffice it to say that this arbitrage is done, more in some markets (U.S. 
Treasury bonds, for example) than others (soybeans). Therefore, futures can be over-