FRM Part I · FRM Exam Part I · Futures Markets
A trader holds a long position in a futures contract on a commodity. The trader does not want to take physical delivery and the contract is approaching its delivery period. Which action is most commonly used in practice to end the position?
The trader would enter an offsetting short position in the same contract before delivery. Closing out with an opposite trade cancels the obligation, and this is how the vast majority of futures positions end. Only shorts issue notices of intention to deliver, so that option does not apply to a long.
- AEnter an offsetting short position in the same contract before deliveryCorrect
- BWait for the clearing house to cash out the position at the average of all bids
- CIssue a notice of intention to deliver to the exchange
- DRoll the position into a forward contract with the same counterparty
Explanation
Most futures positions are closed out by taking an opposite trade in the same contract month before delivery. Only a small fraction (typically under 2%) end in delivery. A long cannot issue a notice of intention to deliver; that is done by shorts.
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