An necessary facet to contemplate when buying and selling futures is whether or not the contract traded is money or bodily settled. All futures contracts have a set lifetime earlier than they expire and are both cash-settled or bodily delivered at expiration.
You will need to perceive the distinction since there are necessary implications primarily based on how a futures contract ends.
Study extra about money & bodily settlements on this 3-minute video:
Money-Settled or Bodily Delivered?
Money-settled contracts embody financially-derived contracts comparable to fairness index rate of interest futures.
If the underlying asset of the futures product is a bodily merchandise that may be touched, then it’s a bodily deliverable futures product, often known as a “deliverable product.” Frequent deliverable merchandise embody crude oil, pure fuel, gold, soybeans, corn & wheat futures.
- Reminder: Know in case your futures contract is a bodily commodity or cash-settled product. If unsure, contact your dealer.
What Occurs When Money-Settled Futures Expire?
Money-settled futures expire instantly into money, which means at expiration a credit score or debit is issued, marking both a revenue or loss in your account. For instance, when a contract of cash-settled E-mini Nasdaq futures expires, the dealer receives both a money credit score or debit primarily based on the product’s remaining settlement value.
What Occurs When Deliverable Futures Expire?
Bodily delivered contracts comparable to gold, oil or soybeans technically require the investor to both produce or take supply of the underlying commodity upon expiration. In different phrases, if you happen to carry a deliverable product by way of expiration, you would be both assigned or delivered the underlying asset.
Since most bodily commodity merchants don’t want to attain supply, it is very important concentrate on the next 2 dates:
- First Discover Date – the primary day the trade can assign bodily supply to traders of futures contracts
- Final Commerce Date – the final buying and selling day of a futures contract earlier than supply of the underlying asset should happen
Bodily commodity buying and selling is prohibited from the enterprise day previous the sooner of the 2 dates above by way of the Final Commerce Date. These dates range by contract and may be discovered on the suitable trade’s web site.
To keep away from supply, it’s the duty of the person dealer to both shut or roll over futures positions earlier than the contract reaches maturity.
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