Future settlements, Arabian opportunities

Worldwide, you can trade almost anything you want to, from energy products like gas and coal, to agro products like cotton and beans, coffee and even live cattle.

But it's not always necessary to have a tangible product to list a future. Futures can be contracts based on a financial asset as well, like futures on stock, bonds or even indices.

There are, for example, futures on German governmental bonds (the Bund future) as well as futures based on the Standard&Poor500-index. These future contracts based on financial assets are called financial futures.

Different derivatives

Futures and options are both derivatives, although different kinds. What they have in common is that these contracts have a limited validation time. After a while they mature and this time of maturity is called expiration.

There is always something to be settled at expiration. A futures contract is a contract which states that a certain kind of underlying value is to be bought for a price that has been agreed upon in the past.

Futures, in general, can either be settled in cash or they can be settled physically. The manner of settlement depends on the contract specifications. It is rather common for futures based on indices to be settled in cash. Your position is cleared at expiration and there will either be an amount of money for you to pay or an amount for you to receive.

It would be too much to deliver all the stock if you have a position in a S&P500 futures contract; you would have to take delivery of 500 different kinds of stock if you are long such a future. But many futures are settled physically, especially futures on commodities.

Therefore, please, always make sure that you close your position on time otherwise you might be stuck with a field full of cattle. If you are a farmer or a really good salesman that might not be a problem, but if you are just an investor or a short term trader trying to make money in the financial markets, please beware!

Contract specs

So, make sure that you are familiar with the contract specifications, know whether or not the products you want to trade in are to be settled in cash or you might be faced with physical delivery.

Also be sure that you are well informed about the exact date and time of expiration; be aware of the last trading day and the trading hours. Every contract has its own specifications, including the contract size.

If you do not keep this in mind you may be too late. If the contract does not involve cash settlement you might see a ship in your back yard unloading barrels of oil. Or maybe a truck delivering live cattle right to your door. Good luck with that!