Daily settlement price shall be the closing price of the Futures Contracts for the trading day or such other price as may be decided by the relevant authority from time to time.
- All futures contracts require that traders post margins in order to trade. The futures exchange requires traders to settle the gains/losses of their accounts on a daily basis.
- This is called daily settlement or marking to market.
- Every day, the gain and loss incurred by each trader is computed based on the market price of the futures contracts.
- After the contracts are marked-to-market, funds are transferred from the traders who have sustained losses to traders who have incurred gains.
- The practice of daily settlement is equivalent to terminating a futures contract at the end of each day and reopening it the next day at the settlement price.
Forward contracts, on the other hand, are typically settled at expiration. Until then, no money changes hands between the counterparties.