What Is the Settlement Price?

The settlement price, typically used in the mutual fund and derivatives markets, is the price used for determining a position's daily profit or loss as well as the related margin requirements for the position.

The settlement price can be calculated in one of several ways and is generally set by defined procedures that differ slightly depending on the exchange and the instrument traded. It may be taken as the average price at which a contract trades, calculated at both the open and close of each trading day, and it is important because it determines whether a trader is required to post additional margins.

The settlement price may also refer to the final price an underlying asset achieves with reference to options contracts to determine whether they are in-the-money (ITM) or out-of-the-money (OTM) at expiration and what their payoffs ought to be. Settlement prices may also be used to compute the net-asset value (NAV) of mutual funds or ETFs on a daily basis.

Key Takeaways

  • Settlement price refers to the price at which an asset closes or of which a derivatives contract will reference at the end of each trading day and/or upon its expiration.
  • The settlement price will be determined on the settlement date of a particular contract.
  • There is no standard across asset classes on how settlement prices must be calculated, and there is thus great variance across exchanges for settlement prices of similar contracts.

Understanding Settlement Prices

Settlement prices are often based on the average price of the contract over a specified period, such as across the trading day, at times using the opening and closing prices as part of the calculation, though not all markets use the same formula.

A settlement price is used as the reference price for marking the value of open derivatives contracts, or for evaluating their value upon expiration. This price is obtained on the settlement date.

Settlement prices are typically based on price averages within a specific time period. These prices may be calculated based on activity across an entire trading day or on activity that takes place during a specific window of time within a trading day. In cases where securities are traded on multiple markets, a closing price may differ from the next day’s opening price due to off-hours activity occurring while the first market is closed.

The opening price reflects the price for a particular security at the beginning of the trading day within a particular exchange while the closing price refers to the price of a particular security at the end of that same trading day.

Settlement, Opening, and Closing Prices

While the opening and closing prices are generally handled the same way from one exchange to the next, there is no standard on how settlement prices must be determined in different exchanges, causing variances across the global markets.

Determining Settlement Prices on Specific Markets

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.

On the Chicago Mercantile Exchange, the settlement prices of certain equity futures were 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. Beginning in December of 2014, the time was shifted to 12:59:30 p.m. and 1:00:00 p.m. CDT, respectively, maintaining the previous 30-second window but basing it on a different time period.

On the Moscow Exchange (MOEX), as another example, settlement prices for the RTS Index and MICEX Index are based on activity between 3:00 p.m. and 4:00 p.m. of the last trading day. The Russian Volatility Index uses a different time period, instead focused on activity between 2:03:15 p.m. and 6:00:00 p.m.

Example of the Settlement Price

If you own a call option with a strike price of $100 and the settlement price of the underlying asset at its expiration is $120, then the owner of the call is able to purchase shares for $100, which could then be sold for a $20 profit, since it is in-the-money. If, however, the settlement price were $90, then the options would expire worthless since they are out of the money.