Cost of Tender Explained: Definition, Impact on Futures Trading, and Management

In the finance industry, understanding the intricacies of futures contracts and associated costs is essential. One such cost is the “cost of tender.” This article provides a comprehensive overview of what the cost of tender entails, its significance, and how it operates within the framework of futures trading.

Cost of tender, in the context of futures trading, encompasses all expenses related to the delivery and certification of commodities obligated under a derivatives contract. It represents the total costs associated with taking physical delivery of the commodity, as opposed to closing out the position prior to expiration.

When a trader holds a futures contract until expiration and chooses to take physical delivery of the underlying commodity, the cost of tender becomes applicable. This cost covers various aspects, including transportation to the delivery point, storage fees, and any other expenses incurred in the delivery process.

In practice, many traders prefer to avoid physical delivery by rolling over their futures contracts to contracts with later expiration dates. This strategy helps them sidestep the complexities and costs associated with taking delivery of the commodity. Additionally, some futures contracts are cash-settled upon expiration, eliminating the need for physical delivery and associated tender costs.

The cost of tender can vary based on several factors, including the chosen delivery point, terms of delivery specified in the futures contract, and commodity prices at different locations. Additionally, transportation costs and storage fees contribute to the overall cost of tender.

Yes, traders often choose to close out or roll over expiring futures contracts to avoid taking physical delivery of the underlying commodity. By doing so, they can bypass the costs associated with tendering and physical delivery.