Options processing 95
Exercise and assignment procedures
Having established which options are in-the-money and therefore
ready for possible exercise or assignment, the decision of the trader
or client is sought (Figure 5.7). There may be standing instructions
to exercise all in-the-money series but care must be taken with client
positions for the reasons given above.
It is good practice to have procedures that require option exercises
to be checked before submission and for an automatic daily check for
any assignments. Late notification of assignment to a trader or client
is not only embarrassing, but could be costly if other deals have
taken place based on a wrong position.
Likewise, missing deadlines for exercise can be costly especially if,
for instance, a trader was exercising on the day before a share went
ex-dividend a call position to take early delivery of shares-cum-large
dividend. If the exercise is missed it cannot be done the following
day, as any resulting shares would be delivered without the dividend
entitlement.
Operations team need to take great care in dealing with position
management and must be aware of the risks associated with exercise,
early exercise (i.e. before expiry in American style options), assign-
ment, closeouts, etc.
Options on futures result in a futures position being created and
again the records must be updated correctly for accounting, reporting
and audit trail purposes.
Client
Clearing
member
Clearing
house
Clearing
member
Client
= Exercise = Assignment
Figure 5.7 Exercise and Assignment Flow
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