Cost of tender is the total charges associated with the delivery and certification of commodities underlying a futures contract. The cost of tender represents the total costs related to taking the physical delivery of a commodity. These costs are assessed only if the futures contract holder wishes to receive the commodity rather than close the position prior to expiration.
The cost of tender is essentially the cost of doing business. Any costs associated with the actual physical delivery of the commodity comprise the cost of tender. For example, if an investor is long corn (owns a futures contract on corn), the seller must deliver the corn to the contract holder when the contract expires (unless the contract holder closes the position prior to expiration). The holder must compensate the seller for the cost of tender including transportation, carrying costs, and any other expenses that are associated with the delivery.
In all types of financial markets, to “tender” means to give notice, in this case to an exchange’s clearinghouse, that delivery of the physical commodity underlying the futures contract will begin. Most investors who invest in commodity futures choose to close their positions before expiration, so they aren’t financially responsible for delivering the commodity. This way, an investor can benefit from movement in the commodity price without having to deal with the major complications of taking physical delivery.
Often, traders will simply roll over a futures contract that is close to expiration to another contract in a further-out month. Futures contracts have expiration dates (while stocks trade in perpetuity). Rolling over helps an investor avoid the costs and obligations associated with the settlement of the contracts. Costs of tender are most often settled by physical settlement or cash settlement. Many financial futures contracts, such as the popular e-mini contracts, are cash settled upon expiration. This means on the last day of trading, the value of the contract is marked to market and the trader’s account is debited or credited depending on whether there is a profit or loss.
Tender charges are usually paid to official warehouses where certification and delivery take place. Sometimes, they can also be due to a clearing house. Tender costs can vary widely between different warehouses, and exchanges are not obligated to enforce limits of any kind on tender charges. Most exchanges will list their costs on their official websites. Sometimes, the exact cost is relayed in the futures contract.
Items to be Included in Tender Price:
- Direct Expenses:
Direct expenses refer to direct materials consumed direct labour and other direct expenses. In calculating tender price, direct materials consumed, direct labour and other direct expenses per unit will the same which were in previous cost sheet. Only expected changes are adjusted in them.
- Factory Overheads:
Since tender price is determined before production is held and hence overheads are completely estimated. The percentage of factory overhead with direct wages will be the same which was in the previous cost sheet.
- Office Overheads:
For tender price, office overhead is certain percentage of factory cost or factory on cost.
- Selling and Distribution Overheads:
For tender price, selling and distribution overheads are certain percentages of either cost of goods sold or selling price.
In tender price, a certain percentage of profit is added. This profit is calculated either at cost price or at selling price.