DEFINITION of 'Last Trading Day'

The last trading day is the final day that a futures contract may trade or be closed out before the delivery of the underlying asset or cash settlement must occur. By the end of the last trading day, the contract holder must be prepared to accept delivery of the commodity or settle in cash if the position is not closed.

BREAKING DOWN 'Last Trading Day'

The last trading day is the final day that a futures contract can be traded or closed out. Any contracts outstanding at the end of the last day trading must be settled by delivery of underlying physical commodities or financial instruments or by agreeing to a monetary settlement. The specific agreements covering these two potential outcomes are contained in the futures contract specifications and vary between securities.

In general, most futures contracts result in a cash settlement rather than a delivery of the physical commodity since most market participants are hedging or speculating. Cash settlements also take care of any chances of default in the future as the buyer and seller need to put up margin and any gains or losses are settled each day. Settlement risk is the risk that the counter party won’t be able to deliver the physical commodity.

Examples of Last Trading Day Transactions

Suppose that a speculative futures trader purchases a gold futures contract with an expiration date of August 31, 2017 and a last trading day of August 30, 2017. If the trader doesn't sell the contract by the end of the day on August 30, the contract must be settled by delivery of the underlying asset or a cash settlement. The trader will likely choose a cash settlement in this case since they were speculating on gold prices.

On the other hand, suppose that a grocery store chain purchases orange juice futures contracts with the same expiration dates. They may choose to take physical delivery of the orange juice from the producer since they can sell it directly to consumers.

Finally, suppose that a farmer purchases wheat futures with the same expiration dates. Unlike the speculative trader, the farmer isn’t interested in betting on future price movement, but he or she also isn't interested in taking delivery. Rather, they may have used the futures contract to hedge their existing crops against a decline in prices. They may choose a cash settlement to offset any decrease in crop prices and boost their profits for the year.

Finding the Last Trading Day 

Traders can find settlement dates by looking at various exchange websites for details. Often times, these exchanges will have a web page that lists all of their futures contracts and their settlement dates and times for traders to consider.

The most popular futures exchanges include:

The Bottom Line

The last trading day is the final day that a futures contract can be traded or closed out. Most futures contracts are closed out with a cash settlement rather than taking physical delivery.

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