In both the equity and commodity derivatives market, to understand if trader has made a profit or loss from a particular contract, settlement price plays a key role.
Daily settlement price is the closing price of the relevant underlying index/security on the trading day of such contracts. Closing price of a contract (futures/options) shall be calculated on the basis of the last half an hour volume weighted average price of such contracts or such other price as may be decided by the relevant authority from time to time. This applies to all the contracts in the derivatives space stocks options/futures and index futures/options. For currency futures, the settlement price would be the RBI’s reference rate on the date of expiry of the contract.
For commodity derivatives contract, daily settlement price is the closing price of weighted average price of all trades done during the last 30 minutes of a trading day. If the number of trades during last 30 minutes is less than 10, then it is based on the weighted average price of the last 10 trades of the day.
On the other hand, final settlement price is the closing price of the relevant underlying on the last trading day of the futures/options contract. In commodities, all open position at close of market on the expiry date of the relevant contract shall be marked for delivery at this price.
On expiry, the difference between the price at which the trade was initiated and the final settlement price of a contract determines the profit or loss for a trader.
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