What is a 'Settlement Price'

A settlement price, in the 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, and it is important because it determines whether a trader is required to post additional margins. It is generally set by defined procedures that differ slightly depending on the exchange and the instrument traded.

BREAKING DOWN 'Settlement Price'

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.

Settlement, Opening, and Closing Prices

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 prices are 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.

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), settlement prices for the RTS Index and MICEX Index are based off 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.

RELATED TERMS
  1. Net Settlement

    Net settlement refers to the resolution of all of a bank's transactions ...
  2. Last Trading Day

    The last trading day is the final day that a futures contract ...
  3. Trade Date

    A trade date is the month, day and year that an order is executed ...
  4. Window Settlement

    A form of settlement between dealers whereby trades are settled ...
  5. Settlement Bank

    A settlement bank is the last bank to receive and report the ...
  6. Account Settlement

    An account settlement generally refers to the payment of an outstanding ...
Related Articles
  1. Personal Finance

    A Guide To Debt Settlement

    Find out how you can negotiate your way to a lower debt load by paying up front.
  2. Personal Finance

    What Is a Lawsuit Settlement Loan?

    A lawsuit settlement loan is a cash advance for an impending settlement or judgment. There can be pricey strings attached.
  3. Taxes

    The truth about IRS tax settlement firms

    These companies claim that they can reduce or even eliminate what you owe to the IRS. Find out the facts behind this alluring fiction.
  4. Trading

    American Vs. European Options

    These two options have many similar characteristics, but it's the differences that are important.
  5. Insurance

    4 Tips for Negotiating an Insurance Settlement

    It is possible to negotiate your own insurance settlement, especially when the injuries are relatively minor and the other party’s fault is obvious.
  6. Investing

    HUD-1 Form: What Must Be On It

    You can't close on property involving federally related mortgages without a HUD-1 form. Use these instructions for a correct form so you close on time.
  7. Trading

    How to Make Money by Trading Index Options

    Index options are less volatile and more liquid than regular options. Understand how to trade index options with this simple introduction.
  8. Trading

    Best Time(s) of Day, Week & Month to Trade Stocks

    Is 9:00am or Noon better to buy stock? Best day? What about best month? Here's how time affects trading decisions based on daily, weekly and monthly trends
  9. Trading

    A Guide to Day Trading on Margin

    Buying on margin is a good option if you don't have the cash to day trade.
RELATED FAQS
  1. Trading hours of world's major stock exchanges

    Learn about stock exchange trading hours, the opening and closing times of some major global stock market exchanges, and ... Read Answer >>
  2. How do futures contracts roll over?

    Learn about why futures contracts are often rolled over into forward month contracts prior to expiration, and understand ... Read Answer >>
  3. How will debt settlement affect my credit score?

    Learn how a debt settlement arrangement, though sometimes the best option to eliminate an outstanding debt, can negatively ... Read Answer >>
  4. What do T+1, T+2 and T+3 mean?

    For security transactions, T+1, T+2, and T+3 refer to settlement dates which occur on a transaction date plus one, two and ... Read Answer >>
Hot Definitions
  1. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  2. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  3. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  4. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  5. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
  6. Price Elasticity of Demand

    Price elasticity of demand is a measure of the change in the quantity demanded or purchased of a product in relation to its ...
Trading Center