contracts have a delivery period during which delivery can be initiated
on any day. Commodity contracts also have a delivery or tender period
during which delivery can be initiated. The length of the tender period
is variable depending on the commodity involved. Other futures con-
tracts have a single delivery day on which delivery can be initiated.
Where physical delivery of the asset is contained in the contract
specification the process can vary from product to product, typi-
cally in reflection of different cash market delivery practices. For
futures contracts, it is always the holder of the short position who
has the rights and can decide at what point during the delivery
period that delivery will be entered into. In certain cases, like gov-
ernment bond futures contracts, the sellers have the right to
decide what will be delivered from the list of deliverable bonds pub-
lished by the exchange.
The reason for this is the nature of physical delivery. The holder of
the short position is the party that has the obligation to deliver the
physical asset, while the holder of the long position will be paying cash
to buy the asset. It is a more involved process to move assets into the
approved point. Therefore, the seller of these assets needs to have more
flexibility than the party who has to pay funds into the relevant place.
Where a notional contract, such as a government bond, is being
delivered, the seller has the choice because they can deliver any of
the bonds which meet the acceptable criteria laid down by the
exchange and are published on the Deliverable List. The seller may
only have one of the bonds on the Deliverable List so they will need
to deliver that particular bond. If the seller has a range of bonds on
the Deliverable List, then they can choose which of the bonds is most
preferable for them to deliver. There would be one bond, which is
known as Cheapest to Deliver.
The delivery obligations are all laid down by the Exchange in the
contract specifications, so each participant should understand the
procedures involved in the delivery process. The buyers should under-
stand that they are subject to the actions of the holders of the short
positions.
It is important to remember that not all positions are taken through
to delivery. In general only a small percentage of contracts go to physi-
cal delivery. The underlying value of those transactions can, however,
be very high. Where a contract does not need to be held until delivery,
an opposing trade can be transacted in the market, and the position
can be closed out so that no further obligations are outstanding.
At delivery or expiry of each contract, the Exchange will issue the
price, at a time determined in the contract specification, which will
60 Clearing and settlement of derivatives