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FRM Part I · FRM Exam Part I · Futures Markets

Which statement about delivery options held by the short in a futures contract on a Treasury bond or a similar commodity is correct?

Delivery options held by the short, such as choosing grade, location and timing, lower the futures price relative to a contract without them. The options are valuable to the short and costly to the long, so the long is willing to pay less for the contract.

  1. AThe short's options to choose the delivery grade and timing tend to lower the futures price relative to a contract without themCorrect
  2. BThe long chooses the delivery location to offset the short's quality option
  3. CDelivery options benefit the long, so the futures price is higher
  4. DDelivery options affect only the spot price, not the futures price

Explanation

Choices of grade, location and timing belong to the short. Because these options have value to the short and cost the long, the long will pay less, so the futures price is lower than for an otherwise identical contract without the options. The long does not choose delivery details.

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