What is a Warehouse Receipt
A warehouse receipt is a type of documentation used in the futures markets to guarantee the quantity and quality of a particular commodity being stored within an approved facility.
BREAKING DOWN Warehouse Receipt
Warehouse receipts are a part of the operational business processing involved with futures contracts for physical delivery. Rather than immediately moving actual commodities backing a contract, warehouse receipts are used to settle futures contracts. For precious metals, warehouse receipts may also be referred to as vault receipts.
Commodities for Physical Delivery
Futures contracts are broadly used by all types of companies manufacturing and transporting various types of goods. Some of the most popular futures exchanges include the Chicago Mercantile Exchange, Chicago Board of Trade, New York Mercantile Exchange and the New York Board of Trade. Futures exchanges are used by buyers and sellers to hedge the price volatility of all types of commodities. In some cases, traders may use the futures market to speculate and profit from arbitrage opportunities. However, the majority of trades made on futures exchanges are done by commercial traders who seek to either sell or buy commodities for physical delivery. Commodities for physical delivery are used to produce and manufacture a wide range of goods that comprise a large portion of the U.S economy’s gross domestic product.
Futures Contract Processes for Physical Delivery
Futures contracts on commodities differ from plain vanilla options on stocks. While stocks and other underlying exchange traded securities can be easily bought and sold electronically with electronic settlement, futures contracts require the tracking of physical inventory.
The tracking of physical inventory provides for some important procedures that must be following by commodity producers. In order for commodity producers to write contracts on their commodity inventory they must be licensed and registered with the appropriate authorities. Commodity producers must also certificate their physical inventory through a certification process that involves inspection and authentication resulting in a certificated stock approval. Certificated stock can then be used to write contracts on inventory in the futures market.
Warehouse receipts are another operational step taken when a physical commodity is used as backing for a futures contract. A warehouse receipt provides the exchange with documentation that the goods authorized for sale are available and ready for transfer to a buyer. The entity selling their inventory will write a futures contract to sell at a specified price. Warehouse receipts are required with the writing of a short commodity futures contract. The entity that takes the long position is assured by the warehouse receipt. The entity with the long position contract at expiration will receive the commodity inventory at the specified price.