Financial Risk Manager Part 1
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A first-year analyst on the commodity futures trading desk of a bank is assessing the desk's current portfolio and its typical trading patterns. The analyst examines why a large majority of the trades made by the desk are cash-settled and reviews the delivery mechanics of cash-settled and physically settled futures contracts. Which of the following observations is the most likely for the analyst to make?
A
Regulators prefer that cash settlements take place whenever possible due to the inconvenient delivery process involved in physically settling futures contracts.
B
The bank should trade physically delivered commodities using forward contracts since they provide a similar payoff to futures contracts, but unlike futures, they trade on exchanges and are less prone to credit risks.
C
It is risky for the bank to take physical delivery of commodities due to uncertainty about the exact underlying asset, delivery location, and delivery timeframe.
D
Taking physical delivery of commodities can involve warehousing costs and storage costs, so traders usually prefer using futures for financial purposes and not for consumption.