Settlement

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Settlement in derivatives markets takes place when a transaction is finalized between a buyer and a seller upon the contract's maturity at a price determined after regular trading hours. It usually takes place at the official daily closing prices of a futures contract.[1] Settlement isn't common in derivatives markets, since most traders exit positions and most contracts are traded out before maturity.

Cash settlement is the most widespread form of settling derivatives contracts like futures and options. It involves closing out the position on maturity by receiving or paying cash. [2] Physical delivery, by contrast, means the investor physically takes possession of the underlying asset on maturity.

"Settlement" can also mean the settlement price, which is determined at the end of the regular trading hours; it is used to calculate gains and losses in futures market accounts, performance bond calls and invoice prices for deliveries.

References

  1. Glossary of Terms. CME.
  2. Glossary. Reuters.