Settlement Price: Definition, Use in Trading, and Example

**Settlement Price Overview** 1. **Definition and Importance**: - The settlement price is a crucial figure in financial markets, especially in futures and options trading. It represents the average price of trades executed during a specific period, typically the closing minutes of the trading session. - It is used to calculate daily profits and losses, determine margin requirements, and execute daily settlements. 2. **Determination of Settlement Price**: - Settlement prices are determined by exchanges and are based on defined procedures that differ slightly depending on the instrument traded. - For most Equity Index futures, the daily settlement price is calculated using a volume-weighted average price (VWAP) based on the last 30 seconds of the trading day. - In futures trading, the settlement price serves as the benchmark for evaluating position market values, calculating floating PNL (profit and loss), and executing daily settlements. 3. **Significance in Trading Strategies**: - Understanding settlement prices is essential for making informed trading decisions based on accurate pricing information. - It is used to determine whether options contracts are in-the-money (ITM) or out-of-the-money (OTM) at expiration and what their payoffs ought to be. 4. **Daily vs. Final Settlement**: - Daily settlement refers to the contract’s settlement price on a daily basis, while final settlement represents the final value of the contract at expiration. - Final settlement prices are used to determine the final value of contracts at expiration, which is critical for investors and traders to understand the true value of their positions. 5. **Settlement Price in Different Markets**: - On the Moscow Exchange (MOEX), settlement prices for the RTS Index and MICEX Index are based on activity between 3:00 p.m. and 4:00 p.m. of the last trading day. - The settlement price is typically set by determining the weighted average price over a certain period of trading, typically shortly before the close of the market. In conclusion, the settlement price is a pivotal reference point in financial markets, serving as the basis for calculating the value of futures contracts and impacting the pricing and trading strategies of options. It standardizes the valuation of contracts, providing clarity and transparency in financial markets and influencing trading decisions and strategies.