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