Retender

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Retender
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Retender in futures contract is the sale of a delivery notice for the underlying asset. Retender is used when the investor doesn't want to keep the underlying asset (usually some commodity, e.g. oil). Retendering causes that commodity is delivered to the buyer of the notice. Futures contracts end with delivery of some goods. But many investors don't want goods, but only to earn on speculations. Therefore, retender is required in futures contracts if the investor doesn't want to have whole tanker of crude oil in his office. Other way of dealing with that problem is selling futures contract prior to expiration.

Retender is the sale of a delivery notice for the underlying asset in a futures contract. A retender (also spelled re-tender) occurs when the buyer of a futures contract doesn't want to keep the underlying asset, which could be a complicated commodity such as corn or oil. By retendering the delivery, or tender notice, they assure that the assets get delivered to the buyer of the notice instead (T. Cave, 2007).

Requiring a Retender

A retender is required when a futures contract holder does not wish to remain in ownership of the commodity stock they receive from a futures contract position. Generally, most futures contract holders who do not wish to receive the stock pertaining to their futures contract will sell the contract on the open market prior to expiration to avoid the need for retender. Some scenarios however may result in commodity delivery and retender by the receiver (S.Verma, 2014)

Procedures for Commodity Delivery

Many traders of futures contracts bet on the direction in which they think the price of a particular commodity is going to move. They do not want to actually buy or receive the tangible asset that the contract is based on. However, a great deal of the commodities market is used for buying and selling goods to support and hedge costs for both producers and manufacturers. As such, procedures are in place to facilitate the delivery of goods after a contract's expiration.

All commodities available for sale must be certificated by an inspector in order for producers to write contracts against their stock. When a contract is transacted it is backed by a warehouse receipt which provides details on the underlying goods including information about their construction, location and storage.

Prior to expiration, holders who will receive commodity stock from their futures contract will begin to receive notices. Several notices are provided leading up to expiration to allow the contract holder to exit the contract if they do not want delivery. They will usually also have the option to roll the contract to a new term. Contract holders receive notice from the first notice day to the last notice day. The seller of the goods can elect the number of notices the contract holder receives. If the holder to receive the goods does not sell the contract by the end of the last notice day then they will receive a delivery notice (S.Treumer, 2012)

Procedures for Retender

Some contracts allow the receiver of a delivery notice certain provisions. A contract holder in receipt of delivery is responsible for the goods they have contracted to purchase. With the delivery notice they have full ownership to use the goods however they would like. With ownership they can relist the goods by writing a new contract. Certain stipulations will apply as outlined in the delivery notice which may require resale by a specific time. The delivery owner is responsible for all costs associated with delivery and resale. Generally retendering can be an unnecessary expense that is better managed by rolling a contract or selling it in the open market before expiration (I.T. Center, 2013).


Examples of Retender

  • Retender can be used when a futures trader is looking to close out a contract but does not want to take delivery of the underlying asset. The trader will then offer to sell the Delivery Notice to another party, who will then become the holder of the Delivery Notice and will be responsible for taking delivery of the underlying asset.
  • Retender can also be used when a producer of a commodity is looking to sell a futures contract but does not want to take delivery of the commodity. They can offer to sell the Delivery Notice to another party, who will then become the holder of the Delivery Notice and will be responsible for taking delivery of the commodity.
  • Retender can also be used when an investor is looking to buy a futures contract but does not want to take delivery of the underlying asset. They can offer to buy the Delivery Notice from another party, who will then become the holder of the Delivery Notice and will be responsible for taking delivery of the underlying asset.

Advantages of Retender

Retender in futures contract is an important option for investors who don't want to keep the underlying asset. There are several advantages to retendering:

  • Retendering allows investors to avoid the cost of storing the underlying asset. It also allows them to avoid the risk of holding a physical asset.
  • Retendering also allows investors to take advantage of any price movements in the underlying asset without actually having to own the asset.
  • It also allows investors to hedge their position in the futures market and reduce their risk exposure.
  • Retendering also provides liquidity to the market, as buyers can quickly and easily acquire the underlying asset without having to go through the long process of finding a willing seller.
  • Finally, retendering can help to reduce the costs associated with a futures contract, as the investor does not have to pay for the asset itself.

Limitations of Retender

Retender in futures contracts is a process of selling a Delivery Notice for the underlying asset. However, there are certain limitations associated with the process. These include:

  • The retender process can be lengthy and expensive, as the underlying asset needs to be evaluated and priced.
  • Retender can be difficult if the underlying asset is not easily divisible or transportable.
  • The retender process can be complex and may require the expertise of a financial advisor or other professional.
  • In some cases, the retender process may require the consent of both parties to the contract before it can be completed.
  • Retender may be subject to certain legal and regulatory restrictions, such as the applicable commodities laws and regulations.

Other approaches related to Retender

A Retender in a futures contract is the sale of a Delivery Notice for the underlying asset. There are several other approaches related to Retender:

  • Direct trading: The buyer and seller negotiate the price of the underlying asset directly with each other, without the need for a third-party intermediary.
  • Spot trading: The buyer and seller agree to exchange the asset at a predetermined price on the spot, with delivery of the asset occurring immediately.
  • Options trading: The buyer and seller agree to enter into a contract in which the buyer has the right, but not the obligation, to purchase the underlying asset at a predetermined price at any time during the term of the contract.
  • Futures trading: The buyer and seller agree to enter into a contract in which the buyer has the obligation to purchase the underlying asset at a predetermined price at the end of the term of the contract.

In summary, Retender is a type of futures trading that involves the sale of a Delivery Notice for the underlying asset. Other approaches related to Retender include direct trading, spot trading, options trading, and futures trading.

References

Author: Krzysztof Kędys

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