Final Settlement Price

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.

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 gold contract expires on 20 October. The exchange polls the spot market on the 18th, 19th and 20th:

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.

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.

• 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.