Physical delivery

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Physical delivery in derivatives markets refers to settlement by receiving or sending the underlying assets - stock certificates, head of cattle - to the holder at the contract's maturation date rather than send the cash equivalent (cash settlement).

Physically-delivered derivatives contracts are generally subject to much tighter speculative position limits by market regulator the Commodity Futures Trading Commission (CFTC).[1] Speculative limits in physical delivery markets are generally set at a more strict level during the spot month (the month when the futures contract matures and becomes deliverable.

Indian regulators attempted to go a step further in 2002 to dissuade some of the speculation in its derivatives market of the Bombay Stock Exchange (BSE) and require that all single-stock futures contracts be physically delivered.[2] Nonetheless, stock futures and options contracts continue to trade on the BSE on a cash-settled basis.[3]


References

  1. ↑ Speculative Limits. CFTC. Retrieved on May 2, 2008.
  2. ↑ Physical settlement for derivatives. The Hindu Business Line. Retrieved on May 2, 2008.
  3. ↑ Derivatives. Bombay Stock Exchange. Retrieved on May 2, 2008.

Resources

  • "A Survey on Physical Delivery Versus Cash Settlement in Futures Contracts," International Review of Economics & Finance, Volume 15, Issue 1: [1]
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