Know about the types of settlement

Gurumurthy K BL Research Bureau | Updated on October 23, 2021

There are three types of settlements available for the commodities futures contract traded on the Multi Commodity Exchange. They are Compulsory, Cash and Both.

Under the category Compulsory, all the futures contracts that are kept open till the end of the expiry must be settled physically. That is, assume that you have bought one lot (1 kg) of gold futures contract. If you hold this position till the end of the expiry, then you will have to pay the seller the total price and get one kg of physical gold. All bullion and base metal contracts traded on the MCX come under the Compulsory settlement category.

In case of cash-settled contract, no physical delivery happens. The difference in the amount, that is the respective profit or loss, will be settled in the form of cash. Say, you have bought one lot (100 barrels) of crude oil futures contract at ₹3,500 per barrel. The contract has closed at ₹4,000 at the time of expiry. In that case, the profit of ₹500 per barrel will be credited to your account. The crude oil and natural gas futures contract on the MCX are cash-settled.

The third settlement type, “Both Option” gives the buyer/seller an option to go for either delivery or cash settlement. All agri-commodities traded on the MCX come under this settlement type. A few days before the expiry, set by the exchange, those holding positions will have to intimate the exchange their choice. Accordingly, the settlement happens at the time of expiry.

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Published on October 23, 2021

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