Expiry and Settlement

Expiry and Settlement

Expiry is the point at which a time-limited contract reaches the end of its defined life. Settlement is the process through which the contractual obligations or final value of the instrument are resolved. These concepts are essential for derivatives because the position does not necessarily remain open indefinitely.

Why Expiry Matters

For an option, expiration determines when the holder’s contractual rights cease or are settled. For a futures contract, the contract has a defined maturity and settlement process. The exact rules depend on the exchange and contract specification.

Physical and Cash Settlement

Some contracts can involve physical delivery of the underlying asset, while others are settled financially in cash. We must never assume that every derivative works the same way. The product specification tells us what happens at expiry.

Practical Example

Imagine that we hold a futures contract approaching its expiration date. If our intention is to maintain exposure beyond that date, we may need to close the expiring contract and establish exposure in a later contract. This process is commonly called rolling the position. The new contract can trade at a different price, so rolling is not a costless or automatic continuation.

Trader Application

Before opening a derivative position, we check expiration, settlement type, last trading day, exercise rules where applicable and any rollover implications. An otherwise correct market view can still produce an unexpected outcome if we misunderstand the contract’s lifecycle.

Key Terms

Expiry, maturity, settlement, physical delivery, cash settlement, rollover, exercise.

Knowledge Check

1. What is expiry?
2. What is the difference between physical and cash settlement?
3. Why might a futures position need to be rolled?