First notice day

A first notice day (FND) is the date on which a buyer of a futures contract may be obliged to accept the delivery of the asset. An FND may differ from one contract to another and depend upon the regulations of the individual exchanges.

Most investors prefer to close their positions before the first notice day, since they are uninterested in physical commodities being delivered to them.

Understanding First Notice Day

In a futures contract, there are specifics as to when and how a commodity shall be delivered. The holder of the short position on this information supplies it to the clearinghouse, which then sends the buyer/the buyer’s long position holder a delivery notice for the impending delivery.

After the first notice day come two other important dates in a futures contract which are the last notice day, the day when a seller cannot deliver commodities to the buyer and the last trading day, the next day after which commodities must be delivered for every open future contract.

Producer hedgers can sell futures contracts to protect themselves from swings in output prices, while consumer hedgers can buy futures to protect themselves from swings in input costs.

Key Concepts of First Notice Day

Ways to Avoid Delivery

Futures contracts are intended for risk control purposes and do not serve as procurement agreements.

A typical method of terminating a futures position without an actual delivery is rolling forward the maturity date of the contract. When it comes to futures trading with margins, several brokerage companies ask their clients to contribute more money beyond the initial margin on FND to cover the delivered commodities.

Conventional wisdom tells traders that it is best to stay out of the market two trading days ahead of FND. As a result, they can have a trade-away or error and still have another whole trading day to have the issues sorted before FND. Those traders who still want a long trade should consider rolling ahead into next month.

Physical Delivery

Futures contracts, forwards, and derivates contracts are the types of derivatives that are either settled in cash or delivered physically at the expiry of the contract. In the instance that a contract is cash-settled, the buyer and the seller take the net cash position of the contract when it expires.

Once it needs physical delivery, the underlying asset bound on the contract is to be delivered on a predetermined date.

Consider a case were sellers ship things physically. Two sides agree on a 1-year crude oil futures contract (March 2019) at a futures price of $58.40. The buyer must buy 1,000 barrels of crude oil (a unit for one crude oil futures contract) from the seller, no matter how much the commodity’s spot price is on the settlement date. When the agreed settlement day in March comes, if the current price is below 58.40 USD, it means that the long contract holder loses money but gains for the short position. Conversely, if the settlement day spot price exceeds 58.40 dollars per bushel, then both long and short ends experience gains and losses, respectively.

Implications for Traders

Implications for buyers

It’s worth bearing in mind that the initial notice day is a very important day for buyers of futures contracts. They should close their positions before that day if they do not plan on taking delivery of the asset that underlies the contract to avoid any possible complications, as the exchange may force them to make deliveries even though this was not what they meant in the first place. For buyers to be able to make decisions based on their positions and first notice day, they must keep a close check on them.

Implications for sellers

It is also important for those selling futures contracts to be mindful of the first notice day. If they don’t want to be obligated to make a delivery, they move out from these spots earlier. However, should any seller consider delivering, they should have enough assets and ensure that they follow the exchange’s delivery rules. If you don’t know what you’re doing, you could get into trouble with fines or other problems when it comes to delivering things.

Examples of First Notice Day

If the first business day of the delivery month of October is Monday, October 1st, then the first notice day for a typical month will be one to three working days earlier: Wednesday, September 26th, Thursday, September 27th, or Friday, September 28th.

Frequently Asked Questions

Why is First Notice Day important?

First Notice Day (FND) is a significant event in the future trading world. This day indicates the day on which the purchaser of a future agreement can demand the actual delivery of the asset in question and vice versa; in other words, it is only at this time when one party may be required to part with an item while another gets hold of it from him/her. Far from general, FND varies across different contracts except that it always happens earlier than the expiration date by a few days. The importance of comprehending FND, as well as the impacts it can have on traders and their strategies, is crucial for those involved in trading.

How does FND affect short positions? What is the relationship between FND and the last trading day? Can I trade a futures contract on FND?

Yes, futures traders are involved in speculation. They expect the price of a commodity to rise or fall, hence seeking to make profits from the gap between the real price and the contract prices.

What is the difference between FND and Last Notice Day (LND)?

A first notice day (FND) is the date when a buyer of a futures contract may be obliged to accept the delivery of the asset.

The last trading day is the end of the period within which a futures contract or other derivatives with an expiration date must be completed in cash or delivered as physical assets.