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EDSP - What is Exchange Delivery Settlement Price

EDSP stands for exchange delivery settlement price and refers to the settlement price of derivative contracts on an exchange. Learn more about EDSP here.

What is exchange delivery settlement price?

The price at which derivative contracts on an exchange are settled is known as the exchange delivery settlement price. The difference between buyers and sellers of a derivative contract is determined using the exchange delivery settlement price (EDSP). This price is used to calculate how much is paid when a futures or options contract expires.

Markets where actual assets are traded, such as the commodities market, do not employ the EDSP. The initial price traded is the price at which commodities are transferred upon delivery.

However, if you are settling the price of an underlying derivative contract in the commodities market, the EDSP is still utilized. 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 typically established on the final trading day of a contract, and payment of the computed difference is often made one or two days later. The last price before expiry for a futures or forward contract will be determined using the EDSP.

Exchange delivery settlement prices, which are also employed in single share futures, are used in stock markets. The EDSP to be applied to each share is decided by stock exchanges. Additionally, the stock exchanges create indices using shares quoted on their market.

How is exchange delivery settlement price calculated?

For each market and exchange, a distinct formula is used to determine the EDSP. A third party's predetermined, fixed rate is used in some exchanges. Others make use of intricate computations based on price data collected over a specific time. The goal is to take the range of prices transacted on the previous trading day and average them out.

To determine the settlement price for the FTSE 100, the London Stock Exchange conducts an auction. Each of the shares that make up the index is subject to intraday auctions on the exchange, which also has a complex set of guidelines for the final trading day of the contract month. The procedure is open-book and aids in calculating an average price weighted by the price that has been traded the most.

EURIBOR EDSP

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.

FOREX EDSP

In comparison to ICE, Eurodollar futures contracts traded on the Chicago Mercantile Exchange (CME) use a more complex method to construct the ESDP. The exchange uses 16 of the top interdealer banks for its rates. The average is then determined after removing the three lowest and three highest values.

For its FX futures contracts, the CME likewise employs a convoluted process to determine the exchange delivery settlement price. The spread is applied to the following most liquid contract month to determine the delivery price on the exchange. On the final trading day, the spread is traded over a brief window of 30 seconds between 9.15.30 am and 9.16.00 am CT.

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.

COMMODITIES EDSP

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

The CME employs a unique opening quotation for US stock indices on the final trading day. Because not all stocks quote opening prices at the same time, calculating the particular opening quotation could take some time. After then, positions are decided in relation to the unique opening quotation. This number might remain active for up to 30 minutes following opening.

It should be noted that the special opening price used for contract delivery may not match the opening index price on the final trading day. This is since the index, which must quote from open, will use a stock's most recent quote if it hasn't yet 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

Determining exchange delivery settlement pricing would be difficult for the majority of traders. Most EDSPs are calculated utilizing enormous amounts of price data that are difficult for anyone to get. One would still need to find the correct response even if they were able to replicate the pricing data that the exchanges had recorded. The calculations and replication of the pertinent data may be possible through large financial firms. But for the typical investor who does day trading, this would be quite difficult.

You may get details regarding EDSP calculation procedures and when exchanges gather price data on the websites of the majority of exchanges. If price fluctuations are uncertain, traders may decide not to trade the contract during these times and may find this knowledge useful.

Several days before the current contract is set to expire, traders might want to make predictions about the following one. This prevents unnatural price fluctuations in some marketplaces. When hedge funds and other big participants go from holding positions in the current month to the next contract, the market may be skewed to one side.

Source: CMC Markets UK

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