Expiration
All futures contracts come with a specific expiration date. Before this date, you have options: you can close or extend your open positions. Some traders decide to hold contracts until expiration. At this point, additional steps are needed to manage the contract.
Settlement
Settlement involves fulfilling the obligations set by the contract. This can happen in two main ways: physical delivery or cash settlement.
Physical Delivery:
- Used for certain commodities like energy, metals, and agriculture.
- Example: A grain producer may deliver physical wheat or corn to a food producer.
Cash Settlement:
- More common, especially for financial instruments.
- Involves a credit or debit for the contract’s value at expiration.
- Common products: equity index futures, interest rate futures, precious metals, foreign exchange, and some agricultural products.
The type of settlement depends on the trader’s needs and the product’s characteristics. Deciding between physical delivery and cash settlement involves considering what each trader aims to achieve from the contract.
