A story as told by John Hull in his book Options, Futures and Other Derivatives.
This story concerns a new employee of the financial institution who had not previously worked in the financial sector. One of the clients of the financial institution regularly entered into a long futures contract on live cattle for hedging purposes and issued instructions to close out the position on the last day of trading. The new employee was given responsibility for handling the account.
When the time came to close out a contract the employee noted that the client was long one contract and instructed a trader at the exchange to buy (not sell) one contract. The result of this mistake was that the financial institution ended up with a long position in two live cattle futures contracts. By the time the mistake was spotted trading in the contract had ceased.
The financial institution (not the client) was responsible for the mistake. As a result, it started to look into the details of the delivery arrangements for the live cattle futures contract – something it had never done before. Under the terms of the contract, cattle could be delivered by the party with the short position to a number of different locations in the United States during the delivery month. Because it was long, the financial institution could do nothing but wait for a party with a short position to issue a notice of intention to deliver to the exchange and for the exchange to assign the notice to the financial institution.
It eventually received a notice from the exchange and found that it would receive live cattle at a location 2000 miles away the following Tuesday. The new employee was sent to the location to handle things. It turned out that the location had a cattle auction every Tuesday. The party with the short position that was making the delivery bought cattle at the auction and then immediately delivered them. Unfortunately the cattle could not be resold until the next cattle auction the following Tuesday. The employee was therefore faced with the problem of making arrangements for the cattle to be housed and fed for a week. This was a great start to a first job in the financial sector!
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