Daily Settlement Price

A futures contract may have three months to run, but the market does not wait three months to find out who is winning. It settles the score every single day.

At the close, the exchange strikes one price per contract — the daily settlement price. Every open position is valued at it. Whoever is down pays that day's loss in cash; whoever is up receives it. And then the crucial step: every position is rewritten as though it had been opened at the daily settlement price. Yesterday's entry price is gone. Tomorrow's profit and loss will be measured from here.

That is why a futures position cannot quietly accumulate a catastrophic unrealised loss the way a forward can. The loss is collected in cash, every day, while it is still small enough to collect.

The price itself is the volume weighted average price of that contract over the last 30 minutes of trading, taken across exchanges — not the last traded price, which a single small order could set. There is a separate daily settlement price for every expiry: the near-month, the next-month and the far-month contracts on the same underlying each get their own.

If a contract was not traded during the last half hour, there is no VWAP to take, so a theoretical price is computed instead, from the spot value of the underlying compounded at the relevant rate of interest over the remaining time to expiry.

The workbook then specifies exactly how the day's profit or loss is computed, and it is three different calculations depending on when the position was opened:

• (a) For contracts executed during the day and not squared off — the difference between the trade price and the day's settlement price.
• (b) For contracts brought forward — the difference between the previous day's settlement price and the current day's settlement price.
• (c) For contracts executed during the day and squared off — the difference between the buy price and the sell price. No settlement price is involved at all.

The daily mark-to-market is cash settled, and the pay-in and pay-out happen before the start of market hours on the next day, by debit and credit to the clearing members' accounts with their clearing banks.

Daily settlement price = VWAP of the contract over the last 30 minutes of trading

If not traded in the last half hour:
    F = S × e^(rt)
        F = theoretical futures price
        S = value of the underlying index or security
        r = rate of interest (the relevant MIBOR rate, or as specified)
        t = time to expiration

A client buys 1 lot of a stock futures contract on Day 1 at Rs 486. Lot size 1,500.

Day 1 uses rule (a) — bought during the day, still open, so measured from the trade price. Days 2 and 3 use rule (b) — brought forward, so measured from the previous day's settlement price.

Check the total against the simple answer:

(475 − 486) × 1,500 = −11 × 1,500 = −Rs 16,500   ✓

The daily amounts telescope to exactly the loss you would have computed in one step. Daily settlement changes the timing of the cash, never the total. What it changes is the risk: by the morning after Day 3 the clearing corporation has collected Rs 28,500 of losses in cash and paid out Rs 12,000 of gains, instead of waiting three months to collect Rs 16,500 from a client who may by then be gone.

On expiry day it works the same way. The workbook's own case: a client long 1 lot of stock futures, lot size 1,500, final settlement price Rs 475, previous day's settlement price Rs 482. He takes delivery of 1,500 shares on T+1 at the final settlement price, an obligation of 1,500 × 475 = Rs 7,12,500, and the difference (475 − 482) × 1,500 = Rs 10,500 is collected from him in cash as the last daily mark-to-market. The short client on the other side delivers the shares and is credited the same Rs 10,500.

Chapter 3, section 3.3, introduces the daily settlement price in the contract specifications and pairs it with the mark-to-market example. Chapter 7, section 7.4 (Settlement Mechanism), gives the formal version: the 30-minute VWAP, the theoretical price formula, the three MTM computation rules and the T+1 cash settlement. The most frequently asked point in the whole chapter is daily settlement price versus final settlement price — one is a futures-market VWAP struck every day, the other is the underlying's cash-market closing price struck once, on expiry day.

• Daily settlement price ≠ final settlement price. Daily is the futures contract's own 30-minute VWAP. Final is the closing price of the underlying in the cash segment on the last trading day. Different markets, different days, different meanings.
• It is a volume weighted average, not the closing price and not the last traded price. The last 30 minutes, weighted by volume.
• Each expiry has its own daily settlement price. There is no single number for "the Nifty futures".
• After settlement, positions are reset to the settlement price. Candidates keep computing the next day's MTM from the original trade price. Rule (b) says otherwise.
• A position opened and closed the same day never touches the settlement price — rule (c) uses the buy price and the sell price.
• Pay-in and pay-out happen before market hours the next day, not at the end of the day the loss arose.
• The theoretical price F = S × e^(rt) applies only when the contract did not trade in the last half hour.