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Dear Earl:
Let me quote from "Futures Trading. By R. Fink and R. Feduniak. New York
Institute of Finance".
The Settlement of Futures Contracts.
This issue provides the basis for a common misunderstanding of
futures trading among novice speculators: the mistaken concern that at
some point they may receive delivery of 38,000 pounds of frozen pork
bellies on the front lawn.
Settlement by Offset.
The vast majority of futures trades are settled by offset. In fact,
less than 2% of all futures contracts that are traded actually result in
delivery. The remaining contracts are settled long before delivery is
ever an issue. In settling by offset, a trader simply enter an order to
sell a contract he is long or to buy back a contract he is short.
Settlement by Delivery.
Those contracts that have not been offset and remain open at the end
of the delivery period must be fulfilled by physical delivery. (One
exception to this is futures that call for cash settlement).
The precise method by which delivery is made varies from market to
market.
For most commodities, deliveries begin before the last trading day.
Anytime on or after the first notice day, shorts may notify the exchange
clearinghouse of their intention to deliver. The clearinghouse then
allocated delivery notices among the longs.
Delivery notices are of two types: transferable and nontransferable.
If a holder of a long position receives a transferable notice he must
sell out his long position within a half hour. Otherwise it considered
accepted and then long must take delivery. A receiver of nontransferable
notice can still sell the contact before the last trading day. But the
receiver of the not will have to pay one day of carrying charges.
The bottom line: get the schedule of the First notice days for the
futures contracts from your broker and post it over the phone.
Yours, Alex.
P.S. If you get live pigs delivered to your front yard, please, give
them a drink right away.
Earl Adamy wrote:
>
> In reviewing contract specs for a number of the non-financial futures on various futures exchange web pages, I'm seeing references to "notice" and "delivery" dates which occur prior to contract expiration. The exchanges don't seem to provide clear explanations of these terms and I don't find anything in my various books. I have a feeling that this may be similar to options which are exercisable prior to expiration. Would someone provide a brief explanation of these terms? The last thing I need is to give/take delivery on a herd of cattle, truckloads of soybeans, or barrels of oil.
What do I need to watch for to avoid problems?
>
> Earl
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