Every futures contract has a specified expiration date and traders have the choice to either close out, or extend the position of the trade without going to expiration. But some traders will choose to hold the contract and instead settle.
Settlement is the delivery of the commodity as per the contract. Delivery mostly takes place as cash settlements and this is when a settlement is made via a credit or debit for the value of the contract at the time of the contract expiration. The most commonly cash-settled products are interest rate futures and equity index, although foreign exchange, precious metals and some agricultural products may also be cash settled. Only a small percentage of all commodities are physically delivered – physical delivery is an important mechanism for energy, metals and agricultural products.
For traders choosing to go to settlement, the form of delivery is highly dependent on the needs of each trader, as well as the unique characteristics of the product being traded.
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