FRM Part I · FRM Exam Part I · Futures Markets
A trader holds a long position in a futures contract on a commodity that is physically settled. The exchange rules allow the short to choose when during the delivery month to deliver. Which statement best describes the position of the long once the short issues a notice of intention to deliver?
Once the short issues a notice of intention to deliver, the exchange assigns it to a long, who must accept delivery and pay the price set by the exchange rules. The long cannot refuse because spot is lower, cancel for a fee, or convert the contract to a forward.
- AThe long can cancel the contract by paying the exchange a fee
- BThe long must accept delivery and pay the settlement price specified by the exchange rulesCorrect
- CThe long may refuse delivery if the spot price is below the futures price
- DThe contract converts automatically into a forward contract with a new maturity
Explanation
In physically settled futures the short decides timing and issues a notice of intention to deliver; the exchange assigns it to a long, who is obliged to accept delivery and pay the specified price. The long cannot refuse based on spot prices, and there is no cancellation or conversion.
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