First Notice Day
What Is First Notice Day?
A First Notice Day (FND) is the day after which an investor who has purchased a futures contract might be required to take physical delivery of the contract's underlying commodity. The principal notice day can change by contract and will likewise relies upon exchange rules.
On the off chance that the primary business day of the delivery month was Monday, Oct. 1, first notice day would regularly fall one to three business days prior, so it very well may be Wednesday, Sept. 26, Thursday, Sept.27, or Friday, Sept. 28. Most investors close out their positions before first notice day since they would rather not own physical commodities. As indicated by CME Group, just roughly 2.5% of futures contracts really go to physical delivery.
Seeing First Notice Day
A delivery notice is a notice written by the holder of the short position in a futures contract illuminating the clearinghouse of the intent and subtleties of delivering a commodity for settlement. The clearinghouse will then send a delivery notice to the buyer, or long position holder of the pending delivery.
Notwithstanding the First Notice Day (FND), the two other key dates in a futures contract are last notice day, the last day the seller can deliver commodities to the buyer, and last trading day, the day after which commodities must be delivered for any futures contracts that stay open. A hedger who is a producer can sell futures contracts to lock in a price for their output. On the other hand, a hedger who is a consumer can buy futures contracts to lock in a price for their requirements.
A common approach to closing a futures position and keeping away from physical delivery is to execute a roll forward to expand the contract's maturity. Brokerage firms that permit futures trading with margin accounts may expect investors to substantially increase the funds in their margin accounts after first notice day, to be certain they can pay for a delivered commodity.
Conventional wisdom says that best practices for all traders is to be out two trading days before FND. Along these lines in the event that there are any out trades or errors, traders actually have a full trading day to sort any issues out before FND. Traders who actually need to be long can constantly roll forward into the next month. What should be underscored is that futures contracts are risk management devices. They are not planned to be procurement contracts.
Physical Delivery
Derivatives contracts, for example, futures or forwards can be either cash-settled or physically delivered on the expiry date of the contract. At the point when a contract is cash-settled, the net cash position of the contract on the expiry date is moved between the buyer and the seller.
With physical delivery, the underlying asset tied to the contract is physically delivered on a foreordained delivery date. How about we check out at an illustration of physical delivery. Expect two gatherings go into a one-year (March 2019) Crude Oil futures contract at a futures price of $58.40. No matter what the commodity's spot price on the settlement date, the buyer is committed to purchase 1,000 barrels of crude oil (unit for 1 crude oil futures contract) from the seller. On the off chance that the spot price on the agreed settlement day at some point in March is below $58.40, the long contract holder loses and the short position gains. On the off chance that the spot price is over the futures price of $58.40, the long position profits, and the seller records a loss.
Features
- The principal notice day and its determinations will be explained by the futures contract subtleties.
- In practice, most derivatives traders close out or roll over their terminating positions to stay away from the prospect of physical delivery.
- First notice day (FND) is a date determined in a futures contract after which time the owner of the contract can take physical delivery of the underlying asset.
