Terminating a Futures Contract

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dinesh.sundrani

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I was going through the Derivatives Material from Schweser and didn't quiet understand the difference between Terminating a Futures Contract using 'Physical Delivery' and using 'Exchange of Physicals'

Could anyone illustrate me some example, to ease my life up a bit?

Thanks,
Dinesh S
 
Physical delivery is a physical exchange done through the Exchange Service you are using (ie the Chicago Board of Trade, New York Mercantile Exchange, etc).

Exchange of physicals is basically the same thing as the above, except it is NOT done through the Exchange, you and the other party who is offsetting your trade meet out of the exchange and swap.

Someone correct me if I'm wrong, I'm winging this and it has been awhile since I've read this material...
 
Is it so? From the reading material, this is the only exception in the law that required trades take place on the exchange floor. The 2 parties PRIVATELY negotiate the terms of the transaction.

To me, I think, if 2 parties are involved in EFP, they only need to INFORM the clearing house (no need to get approval from the exchange), because an EFP differs from a delivery in that the traders actually exchange the goods, the contract is not closed on the exchange floor. The long position continues the contract with the exchange if this futures is prior to expiration.
 
Sondin,

First of all, delivery through the exchange is (or may, be, depending on the commodity and the exchange) an actual physical delivery of goods. You deliver to the established Exchange delivery point, or you pick up the commodity at the delivery point.

Second, I believe the reason why you can't just inform the Exchange of your EFP plans is because the contract you and the counter-party have entered into are WITH the Exchange, and the Exchange only. You have to play by their rules.
 
Reading this thread got me more confused than ever. Could anyone elaborate me the exact difference? What I feel about the difference is exactly what 'culley' said.

Regards,
Dinesh S
 
Can you explain more precisely what point you're confused on?

I'll provide an example for corn, since I'm somewhat familar with it. When you buy a futures contract, you can hold it with the intent of buying the underlying commodity. Think of this as buying from the Exchange, as at expiration you would drive up to an Exchange delivery point (picture a grain elevator) and in rough theory, you would hand the elevator your long futures contract (purchase of underlying corn) and they would load out your truck with corn, you would pay the exchange the price you bought futures at and go about your merry way.

When you bought the futures contract, an additional party sold that contract to you, I'll call him party B. Party B sold contract of corn to you, THROUGH THE EXCHANGE. When the contract expires, party B must drive up to that same Exchange delivery point and deliver his corn at the price he locked in his futures sale at.

See how it works? For normal delivery, you go through the exchange. If you do exchange for physicals method, the buyer and seller of a futures contract (bought and sold thru the Exchange) exchange corn on their own terms, away from the Exchange delivery point. The Exchange must approve of this though, because the original contract was done through the Exchange and expects them to deliver / pickup at their delivery point.

Hope this helps.
 
Thats a fantastic way of explaining, culley!! I am crystal clear on it now.

Thanks,
Dinesh S
 
BTW - You also gain flexibility on what is delivered (e.g., grade of corn) and its price as well as where it's delivered.
 
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