The settlement price, in general, is the current price of an asset in the financial market. This depends on the supply and demand of investors.
Those interested in buying a financial security will seek to pay as little as possible, while the offeror will point to the opposite. As a result of the negotiation, a price accepted by both parties will be reached. At this point the market is considered to have settled.
Settlement price in derivatives markets
The settlement price, in the context of derivative contracts, is that for which an option or future is sold. To understand it better, we will present an example.
Suppose José Francisco buys a future for $ 1,000 and decides to sell it at a settlement price of $ 1,200.
So, if the transaction goes through on April 25, let's assume that the investor is withheld a guarantee of US $ 8,000 the day before. This is required as coverage, in case prices fluctuate a lot in the market, and it is returned on the day of the sale.
Let us also consider that the intermediary charges a commission of US $ 2 for each operation (2 for the purchase and 2 for the sale of the future, a total of US $ 4). In addition, US $ 5 had to be disbursed at the market rate set by the derivatives governing company in the country.
Then, the profit of the operation would be calculated as follows:
1,200-1,000-4-5 = US $ 191
Other meanings of settlement price
Another meaning of the liquidation price is one that is very low compared to the normal one. It is established with the aim of rapidly reducing the stock of merchandise, increasing sales. This can be a strategy of the company to affect its competition.
Another meaning that can be given to the settlement price is one that has allowed transactions to occur in the market. This is because it is an intermediate point between what the seller and the buyer are looking for.