An introduction to cash-settled contracts
Caroline Bitton, Sales Manager - Commodities at Euronext, explains what is a cash-settled commodity contract and its advantages, and gives some anticipations on a durum wheat cash-settled future contract Euronext is going to launch.
Listen to the full interview. Watch the video.
What is a cash-settled contract?
A cash-settled contract is a future 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 he can keep his position until the last day, and he has the guarantee of exiting his position at the expiry price.
How is the 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 is the advantage of a cash-settled contract?
At the beginning, the advantage is similar to a physical delivery contract - explains Caroline Bitton. This means providing a hedging tool to manage the price risk but without the complexity associated with the physical delivery, which isn't suitable for certain markets for reasons like logistics, market-size or the underlying product.
Are there any contracts of this type at Euronext?
We are about to launch, very soon, a durum wheat cash-settled future contract which uses an index produced by Sitagri Index Services who have created a French-Italian durum wheat index.
How does the contract work?
It will work like all future contracts, so 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 a cash-settled platform, we can extend our range and offer new underlyings that are not feasible by physical delivery.