Friday, 1 December 2017

Things You Must Know About Derivatives Expiry

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Usually, the derivatives that are traded on the exchange are of two types. They are Futures and Options. The future and options are contracts that are traded on the exchange. Whoever is willing to buy this contract is known as the contract buyer and he agrees to buy or sell the underlying assets at a fixed price at a future date. Once committed, the buyer has to fulfill the agreement at all costs. The only difference between the future and option is that in an Options contract, the buyer can let the contract expire without fulfilling the terms of the agreement but in future, it is compulsory to fulfill.

What is derivatives expiry?

Derivatives expiry is the future date in which the contracts have to be fulfilled. The exchange has declared that the contracts can only expire on the last Thursday of every month. This is done so that there is no confusion among the traders. However, if last Thursday of every month happens to be a trading holiday, then the previous trading day would be counted as the expiry date.

The contracts are settled on the expiry day. In case of Options, the contracts just get expired on the expiry date. The derivative settlement can be done by two prominent ways. First is that you can buy another contract that nullifies your contract. Or the second method is that you can settle for cash.

Here is an example to better understand the things. Let us assume that you bought a futures contract which allows you to buy 100 shares of ABC Company. So to close the contract, you must buy another futures contract that allows you to sell 100 shares. However, in this case, you will have to pay the difference in the price of the contract. Every contract is traded at a particular value. Therefore, the settlement value of the derivative is tied to the closing price of the stock on the last day.

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