Final Settlement Price
Also written FSP · Final Settlement Price (FSP) · Due Date Rate · DDR
The price at which a commodity derivative is finally settled at expiry — a simple average of the polled spot prices of the expiry day and the two days before it.
In plain language
Every open position has to be closed at a number, and on the last day that number cannot be the last traded price — a thin final minute would let one trade decide what everybody pays.
So the exchange polls the physical market instead. The Final Settlement Price, also called the Due Date Rate, is built from the polled spot prices of the expiry day and the two days before it, and it is the price at which delivery is invoiced or cash settlement is paid.
It is a different animal from the Daily Settlement Price, which is struck every day to run mark-to-market. DSP settles the day; FSP settles the contract.
How it works
Polled spot prices come from a panel of empanelled traders and users of the commodity across the country. Outliers are stripped by a bootstrapping procedure around the median, and an algorithm then picks the figure with the least standard deviation against the polled set. On NCDEX the polls are disclosed twice a day, at around 1:30 pm and again at around 4:00–5:00 pm. For agricultural goods these are ex-warehouse prices, inclusive of Mandi Cess but exclusive of GST.
The FSP itself is then the simple average of the polled prices on E, E-1 and E-2, where E is the expiry day.
Three consequences the workbook draws out:
- Options on Goods take the same FSP as the futures expiring that day — which is why arbitrage between the two is possible.
- Options on Futures take a different reference: the FSP for the option is the DSP of the underlying futures on expiry day.
- Commodity index futures are not polled at all. Their FSP is computed after 5:00 pm from the weighted average traded price of the constituent futures between 4:00 pm and 5:00 pm.
A worked example
A gold contract expires on 20 October. The exchange polls the spot market on the 18th, 19th and 20th:
| Day | Polled spot price (Rs per 10 g) |
|---|---|
| E-2 (18 Oct) | 49,700 |
| E-1 (19 Oct) | 49,900 |
| E (20 Oct) | 50,100 |
| FSP = simple average | 49,900 |
A seller holding one gold contract of 1 kilogram now invoices at Rs 49,900 per 10 grams — 49,900 x 100 = Rs 4,99,00,000. The last traded price on the screen that evening is irrelevant to the invoice.
Now take the workbook's own gold option set against the same FSP of Rs 49,900, with strikes running from Rs 45,000 to Rs 55,000 in steps of Rs 1,000. Calls struck at Rs 49,900 or below are in the money and are exercised automatically unless the buyer files a contrary instruction; calls above it expire worthless.
And the fallback case: if spot markets are shut for Diwali right up to the 20 October expiry, and the last available poll was 13 October, that 13 October price is used as the FSP — the last resort in the exchange's escalation ladder.
Why NISM asks about it
Chapter 3 (Commodity Futures), section 3.10 on spot price polling, and Chapter 6 (Trading Mechanism), where FSP is contrasted with DSP and Last Traded Price. Chapter 7 uses it again for delivery obligations and for the delivery default penalty. Expect the E, E-1, E-2 averaging rule as a direct question, a DSP-versus-FSP distinction question, and the "FSP for Options on Futures is the DSP of the underlying futures" point, which is very easy to get backwards.
Common exam traps
- FSP is not the last traded price. LTP is whatever the final trade printed; FSP follows a documented polling methodology and the two routinely differ.
- FSP is not the Daily Settlement Price. DSP runs daily mark-to-market; FSP settles the contract at expiry. Due Date Rate is another name for FSP, not for DSP.
- Three days, not one — the simple average of E, E-1 and E-2 polled prices.
- Options on Futures use the futures DSP as their FSP; Options on Goods use the futures FSP. Same words, different reference.
- Index futures are not polled. Their FSP comes from the 4:00–5:00 pm weighted average traded price of the index constituents' futures.
- FSP also drives the delivery default penalty and the compensation paid to the aggrieved buyer, so an error in it propagates straight into a penalty computation.
Where this is taught
- Series IV · Chapter 3: Exchange Traded Interest Rate Futuresintroduced here
- Series XVI · Chapter 2: Commodity Indicesintroduced here
- Series I · Chapter 3: Exchange Traded Currency Futuresintroduced here
- Series V-D · Chapter 15: Introduction to Forwards and Futuresintroduced here
- Series VIII · Chapter 3: Introduction to Forwards and Futuresintroduced here
- Series VIII · Chapter 7: Clearing, Settlement and Risk Management
- Series XVI · Chapter 3: Commodity Futures
- Series V-D · Chapter 20: Exchange Traded Interest Rate Futures
- Series XVI · Chapter 6: Trading Mechanism
Related terms
- Daily Settlement PriceThe price at which every open futures position is marked and reset at the end of each day — the last 30 minutes' volume weighted average price of that contract, computed separately for each expiry.
- Compulsory deliveryA delivery logic under which every position still open at expiry must give or take physical delivery — neither side can elect to settle in cash.
- Contrary instructionAn instruction from the holder of an in-the-money option telling the exchange **not** to exercise it — the only way to stop an ITM contract being exercised automatically at expiry.
- Delivery default penaltyThe SEBI-prescribed charge on a seller who fails to deliver against an expiring contract — a fixed percentage of the settlement price plus a replacement cost, most of which is paid over to the buyer.
- Spot price pollingThe statistical process by which an exchange collects physical-market prices from an empanelled panel of traders and users, strips out outliers, and publishes a single daily spot price.
- Interest Rate FuturesA standardised exchange-traded contract to buy or sell a notional government security, or an interest rate itself, at a price agreed today for settlement on a future date.
- Corporate Bond Index FuturesCash-settled futures on an index of corporate debt rated AA+ and above, permitted by SEBI in January 2023 to give the corporate bond market a hedge of its own.
- ExercisePutting an option's right into effect: a call holder buys the underlying at the strike, a put holder sells at the strike. In cash settled IRD options the holder simply receives the difference.
- Close to the moneyThe band of option strikes clustered around the at-the-money strike which, in Options on Goods, lapse unless the buyer gives an explicit instruction to exercise them.
- SettlementThe step where the obligations computed by clearing are actually discharged — commodities against funds on a delivery-versus-payment basis, or cash against the settlement price.
- Staggered delivery periodThe window before expiry in which buyers and sellers holding open positions may mark an intention to give or take delivery, spreading deliveries out instead of stacking them on expiry day.
- Options on FuturesA European commodity option whose underlying is a futures contract, so exercise devolves into a futures position opened at the strike price rather than into delivery of the goods.
- Barter systemThe direct exchange of one good for another, with no money involved — the starting point the workbook uses to trace how commodity trading evolved into spot markets, forward contracts and finally futures.
- BootstrappingThe statistical method exchanges use to clean spot price polling data — removing outlier quotes and repeatedly testing random selections until the final polled price has the least standard deviation against the full set.
- Empanelled polling participantsThe traders and commodity users an exchange formally registers to report spot prices from centres across the country, feeding the daily spot price polling process that underpins futures and final settlement pricing.
- Both optionsA commodity futures settlement type in which physical delivery happens only if both the buyer and seller agree to it — if either declines, the open position is cash-settled at the Due Date Rate instead.
- Replacement costThe part of a seller's delivery-default penalty measured against the market — the gap between the settlement price and the actual spot price the non-defaulting buyer would need to pay to replace the missed delivery.
- FSP fallback methodsThe ladder an exchange climbs down when polled spot prices are missing at expiry — a shortened average back to E-3, an alternate basis-centre price, extrapolation, futures prices, then the last available poll.
- Goods and Services TaxA destination-based tax on consumption, levied at every stage from manufacture to final consumption, with credit for tax paid at earlier stages available as setoff so that only value addition is taxed.
- Inter-state delivery problemThe GST trap in exchange delivery — the exchange collects only CGST and SGST, so a buyer tagged to a seller in another state may be unable to claim credit without a registration for that state.
- Last Traded PriceThe price at which the last contract of the session was traded — one print, and therefore routinely different from the Daily Settlement Price or Final Settlement Price, which follow a documented methodology.
- Net obligation reportThe end-of-day report giving a trading member's net obligation, margin deposit, margin utilised, available deposit, the pay-in or pay-out required and the transaction fee payable or receivable.
- Premium and discount for qualityThe price adjustment when delivered goods differ from the contract's quality specification — a 1:2 discount on castor seed below 47%, and contract rate times 999/995 for .999 gold on a .995 basis.
- Principle of least errorThe rule behind the spot polling algorithm — the final polled price is the figure with the least standard deviation against the set of polled prices, similar to the least square method of regression.
- FBIL reference rateThe daily USD/INR (and EUR, GBP, JPY vs INR) benchmark rate published by Financial Benchmarks India Pvt Ltd around 1.30 pm; it is the final settlement price of INR currency futures and options.
- Expiry dateThe last trading day of a currency futures or options contract — for monthly contracts, two working days before the month's last business day; for weekly, every Friday — with trading stopping at 12.30 pm.
- Contract cycleThe period over which a derivative contract trades, and the set of expiries available at once — for NSE stock and index futures, a three-month cycle of near, next and far months.
- Spot priceThe price at which the underlying asset trades in the cash market for immediate delivery — the anchor from which futures prices, basis, moneyness and final settlement are all measured.
- Contract specificationsThe terms of an exchange-traded derivative that the exchange fixes in advance — underlying, lot size, contract cycle, expiry day, tick size, settlement prices, trading hours — everything except the price.
- Physical settlementSettling a derivative on expiry by actual delivery of the underlying shares against payment. In India, all stock futures and options open at expiry have been physically settled since October 2019.
- Expiration dayThe last trading day of a derivative contract, on which it ceases to exist and all open positions are compulsorily settled — the last Tuesday of the month for NSE contracts, the last Thursday for BSE.