What is exchange delivery settlement price?
The exchange delivery settlement price is the settlement price of derivative contracts on an exchange. The exchange delivery settlement price (EDSP) is used to calculate the difference to be settled between buyers and sellers of a derivative contract. This is the price used at the expiry of a futures or options contract to determine how much is paid.
The EDSP is not used in markets that exchange physical assets, for example, the commodities market. The price at which commodities exchange hands on delivery is the original price traded.
However, the EDSP is still used if you are settling the price of an underlying derivative contract on the commodities market. This is because these types of contracts are not settled for physical delivery. In fact, a vast majority of crude oil contracts on NYMEX are cash settled.
Whether the contract is for a financial or physical asset does not affect the need for exchange delivery settlement prices. Exchanges need to use an EDSP to calculate the difference between the traded price and price at expiry.
The EDSP is usually set on the last trading day of a contract, and payment of the difference calculated is usually a day or two thereafter. In the case of a futures or forward contract, the EDSP will be used to determine the last price before expiry.
Stock markets also use exchange delivery settlement prices as they are used in single share futures. Stock exchanges are in charge of determining the EDSP to be used for each share. Plus, the stock exchanges calculate indices that are made up of shares quoted on their exchange.
How is exchange delivery settlement price calculated?
How to calculate the EDSP is different for each market and exchange. Some exchanges use a set, fixed rate from a third party. Others use complicated calculations made up of price data over a set period. The idea is to average out the various prices traded on the last trading day.
The London Stock Exchange uses an auction to calculate the settlement price for the FTSE 100. The exchange holds intraday auctions in each of the constituent shares of the index and has a complicated list of rules for the last trading day of the contract month. The process is transparent and helps determine an average price weighted by the price most traded.
The three-month Euribor future gets its EDSP from the Euribor fixing as set by the European Money Markets Institute. The rate is set at 11am CET every day. The corresponding futures exchange, Intercontinental Exchange (ICE), uses the rate set on the last trading day of the contract.
Eurodollar futures contracts traded on the Chicago Mercantile Exchange (CME) use a more elaborate way to create the ESDP, as compared to ICE. The exchange takes the rates from 16 leading interdealer banks. It then discards the three lowest and three highest and calculates the average.
The CME also uses a complicated procedure to calculate the exchange delivery settlement price for its FX futures contracts. The exchange calculates the delivery price by applying the spread to the next most liquid contract month. The spread used is traded over a short window of 30 seconds, between 9.15.30 am and 9.16.00 am CT on the last trading day.
The exchange uses the volume weighted average price of both front contract and next most liquid contract. This calculation is used to determine the spread. This spread is then applied to the closing price of the next contract month. This calculation determines the delivery price of the front contract.
In the case of WTI light sweet crude oil futures, the exchange takes the prevailing market price for US light sweet crude and uses the penultimate settlement price per barrel of crude. Prices quoted are in USD as published by NYMEX.
STOCK INDICES EDSP
For US stock indices, the CME uses a special opening quotation on the last trading day. The special opening quotation may take time to calculate because not all stocks quote opening prices at exactly the same time. Positions are then settled against the special opening quotation. This number may be available up to 30 minutes after opening, or longer.
Note that the opening index price on the last trading day may differ from the special opening price used for contract delivery. This is because the index, which must quote from open, will use the last quote of a stock if that stock still hasn’t opened.
The CME uses this method in all the indices quoted by the exchange, including the S&P 500 and NASDAQ indexes. Other exchanges, such as the EUREX Futures Exchange, also use the same method to calculate the exchange delivery settlement price. The exchange uses the opening prices of the constituent shares in the DAX index on the last trading day.
The CAC40 future, quoted on EURONEXT, uses an exchange delivery settlement price calculated on the last trading day. The exchange calculates the arithmetic mean of all prices quoted during a window. The window runs from 3.40pm to 4pm CET on the last trading day.
How to determine exchange-related settlement prices on specific markets
The determination of exchange delivery settlement prices would prove difficult for most traders. Most EDSPs are calculated using large amounts of price data, which would be difficult for individuals to capture. Even if one has the capability to mirror price data captured by the exchanges, they would still need to calculate the correct result. Large financial institutions may be able to mirror the data required and make the necessary calculations. However, for the typical investor involved in day trading, this would be very difficult.
EDSP calculation methods and at what time the exchanges take price data is available on most exchanges’ websites. This information could be useful to traders, as they may choose not to trade the contract during these times if price movements are more volatile.
Traders might want to speculate on the next contract a few days before the current contract is scheduled to expire. This avoids unnatural price movements in certain markets. Typically, hedge funds and other large players may be skewing the market to one side as they switch their position in the current month to the next contract.
Source: CMC Markets UK