FRM Part I · FRM Exam Part I · Introduction to Derivatives
A corporate treasurer needs to sell 5,000 tonnes of a commodity in three months and hedges with futures that are priced per tonne. Which statement best describes the main reason most futures positions are closed out before delivery rather than settled by delivery?
Most futures positions are closed out because participants want the financial result of the price exposure, not the physical asset. Offsetting with an opposite trade avoids delivery costs and logistics, even though delivery is permitted and remains the mechanism that anchors futures prices to spot.
- AClosing out lets the participant lock in the gain or loss from the hedge or speculation without incurring delivery costs and logisticsCorrect
- BExchange rules prohibit delivery for any commodity contract
- CDelivery is only possible when the futures price equals the spot price
- DClosing out is required because futures margins cannot be returned until the contract is delivered
Explanation
Most participants hedge or speculate on price and do not want physical delivery, which is costly and inconvenient. They offset the position with an opposite trade. Delivery is permitted, and margin is returned on closing out.
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