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Retender in Finance: Definition, Processes, and Practical Applications

Last updated 03/15/2024 by

Alessandra Nicole

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Summary:
Retender, a crucial concept in the finance industry, involves the sale or assignment of ownership in commodity delivery resulting from a futures or forward contract. This article meticulously explores the intricacies of retender, its applications, and the procedures associated with commodity delivery. Understanding retender is essential for finance professionals seeking a pragmatic approach to managing futures contracts and mitigating risks associated with physical delivery.

What is retender? Definition, process, and implications

Retender, or re-tender, stands as a pivotal process in the realm of futures contracts, representing the sale or assignment of ownership of a commodity or asset intended for delivery. This mechanism becomes particularly relevant when the holder of a long futures contract expresses unwillingness or inability to take physical possession of the underlying asset.

Understanding retender

A retender transpires when the buyer of a futures contract opts not to retain ownership of the underlying asset, which could range from agricultural commodities like corn to vital resources such as crude oil. The essence of retender lies in ensuring the delivery of assets to the buyer of the notice instead.
Typically, retender becomes necessary when a futures contract holder decides against maintaining ownership of the commodity stock received from the contract. While many holders preemptively sell the contract on the open market before expiration to avoid retender, certain situations may necessitate the actual delivery and subsequent retender by the receiver.

Procedures for commodity delivery

In the complex landscape of futures contracts, traders often engage in speculation on commodity price movements without the intention of acquiring the physical asset. However, a substantial portion of the commodities market involves the exchange of goods to support and hedge costs for producers and manufacturers. To facilitate this process, procedures are meticulously designed to ensure seamless commodity delivery after a contract’s expiration.
Commodities available for sale must undergo certification by an inspector, providing producers the ability to write contracts against their stock. Transactions are backed by a warehouse receipt detailing crucial information about the underlying goods, including construction, location, and storage.
As expiration approaches, holders anticipating commodity stock delivery receive notices, allowing them to exit the contract if possession is undesired. Rolling the contract to a new term is also a viable option during this phase.
Contract holders receive notices from the first notice day to the last notice day, with the seller determining the number of notices provided. Failure to sell the contract by the last notice day results in the receipt of a delivery notice.
WEIGH THE RISKS AND BENEFITS
Here is a list of the benefits and the drawbacks to consider.
Pros
  • Facilitates sale or assignment of ownership in commodity delivery
  • Provides flexibility for futures contract holders
  • Enables avoidance of physical delivery for those unwilling or unable
  • Allows commodity owners to use goods as they see fit after delivery
Cons
  • May result in unnecessary expenses for retendering
  • Certain stipulations in delivery notice may limit options
  • Delivery owners are responsible for all associated costs
  • Retendering can be an avoidable expense, better managed by rolling or selling before expiration

Frequently asked questions

Why is retender necessary?

Retender becomes necessary when the holder of a long futures contract decides against keeping the underlying asset, prompting the sale or assignment of ownership in commodity delivery.

Are there specific scenarios that might lead to commodity delivery and retendering?

Yes, while most futures contract holders sell the contract on the open market before expiration to avoid retender, certain circumstances may require actual commodity delivery and subsequent retendering by the receiver.

What responsibilities do delivery owners have?

Delivery owners are responsible for all costs associated with delivery and resale. They have full ownership of the goods received and can relist them by writing a new contract.

Can retendering be avoided?

Retendering can often be an unnecessary expense. 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 before expiration to avoid the need for retender.

Key takeaways

  • Retender involves the sale or assignment of ownership in commodity delivery.
  • It provides flexibility for futures contract holders who wish to avoid physical delivery.
  • Procedures for commodity delivery include certification, notice periods, and options for contract holders.
  • Retendering can be an avoidable expense, better managed by rolling or selling before expiration.

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