Delivery
When an option is exercised and assigned the option position is closed
out and replaced with a transaction in the underlying. So one BP 330
Call becomes 1000 BP shares @ 330p.
The internal records will need to be updated to reflect this. Clients
will need to be advised of the ‘result’ of the exercise/assignment and
they will need to amend their portfolio accordingly and arrange for
delivery/payment instructions with their custodian/broker.
The settlement of that transaction will now take place under the
normal market terms applicable to the underlying, for example UK
equity shares would settle T 3 via CREST.
Summary
Options present the operations team with some challenges, not least
ensuring that any exercise or assignment situations are managed
correctly. Good-quality data on expiry dates, strike prices and the
option status, i.e. in-, at- or out-of-the-money will also prove valuable
in assessing the funding and likelihood of exercise or assignment.
As with futures, closeouts must be done promptly and accurately to
avoid problems.
It is also a case that the impact of a corporate action on the underly-
ing may create a change to the contract specification. This is covered
in greater detail in another chapter.
96 Clearing and settlement of derivatives
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