Settlement Price

What is a 'Settlement Price'

A settlement price, in derivatives markets, is the price used for determining profit or loss for the day, as well as margin requirements. The settlement price is the average price at which a contract trades, calculated at both the open and close of each trading day. Additionally, it is important because it determines whether a trader may be required to post additional margins. It is generally set by defined procedures that differ slightly among each exchange and the instrument traded.

BREAKING DOWN 'Settlement Price'

Typically, the settlement price is set by determining the weighted average price over a certain period of trading, typically shortly before the close of the market. For example, on the Chicago Mercantile Exchange, the settlement prices of certain equity futures are determined by a volume weighted average of pit trading activity in the 30 seconds between 3:14:30 p.m and 3:15:00 p.m. CDT.

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