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| Licensed Warehouse |
A licensed warehouse is a warehouse approved by an exchange from which a commodity may be delivered under a financing, facilities, capacity, and location and has been approved as acceptable for delivery of commodities against futures contracts.
Indeed, exchange-traded commodities, such as energy commodities, are traded in specific lots of specific quality for specific delivery and usually also trade in forward, futures, and options contracts.
The warehouse must verify that the products delivered in their walls are conforming to the contract specifications. Furthermore, only 2% of the transacted commodity futures contracts give way to delivery.
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Investors, generally, close their contracts before expiration so that they do not have to take delivery of enormous quantities of commodities for which they have no storing space and no need. Therefore, as the delivery date nears, most investors close out their positions by undertaking an equal and opposite trade.
A warehouse operator cannot issue a warehouse receipt unless that person holds a warehouse license issued by an accredited organism. All delivery of commodities must be inspected and graded to comply with the exchange specifications, stored at a licensed warehouse, and fully insured against loss from fire, windstorm, and explosion.
