What are cash-settled commodity contracts?
An introduction to cash-settled contracts
Caroline Bitton, Sales Manager - Commodities at Euronext, explains what a cash-settled commodity contract is and its advantages, and gives some insight into the new durum wheat cash-settled future contract that Euronext is launching.
Listen to the full interview. Watch the video.
What is a cash-settled contract?
A cash-settled contract is a futures contract which allows the buyer and the seller to go to the expiry date without the need to start a physical delivery process. This means they can keep their position until the last day, and they have the guarantee of exiting their position at the expiry price.
How is the cash-settled contracts expiry price set up?
The expiry price is calculated by the clearing house which uses a BMR (Benchmark Regulation) index approved by the stock market regulatory authorities.
The clearing house calculates the arithmetic average of this index based on the last month of trading. It then gives the expiry price at which the buyers and the sellers will exit from their position.
What are the advantages of a cash-settled contract?
To start with, the advantages are similar to the advantages of a physical delivery contract. The cash-settled contract, just like a physically-delivered contract, works as a hedging tool to manage price risk.
However, settling the contract in cash removes the complexity associated with physical delivery, which can be unsuitable for certain markets for reasons such as logistics, market size, or because of the nature of the underlying product.
Are there any contracts of this type at Euronext?
We are about to launch a Durum Wheat cash-settled future contract which uses a French-Italian durum wheat index produced by Sitagri Index Services.
How does a cash-settled contract work?
It works like all futures contracts - according to how the position taken by the buyers and sellers develops. The only difference is the calculation on the final day of trading. For example, if you have a December expiry, it will be the index average between the 1st and the 31st of December.
And what about historical contracts?
The Euronext MATIF contracts, Wheat, Corn, Rapeseed, involve physical delivery and will remain the same.
Thanks to the launch of our cash-settled platform, we can extend our range and offer new underlyings that are not feasible with physical delivery.