What is Exchange Delivery Settlement Price (EDSP)?

How EDSP Works?

The EDSP plays a key role in determining the final price of a derivative contract, such as futures or options, when it expires. It ensures that both buyers and sellers settle their obligations based on the difference between the price they initially agreed upon and the final settlement price.

For example, in the commodities market, if you trade a derivative contract, such as crude oil futures, you don't actually have to take physical delivery of the oil. Instead, the settlement is made in cash using the EDSP. This is common with many contracts like crude oil on NYMEX, which are settled without any physical delivery.

No matter if the contract is for a financial asset like stocks or a physical asset like oil, the EDSP is essential in calculating the final difference between the traded price and the price at expiry.

When is the EDSP Calculated?

The EDSP is typically determined on the last trading day of a contract. Payments based on the calculated difference are made shortly after, usually within one to two days. Stock exchanges use the EDSP in trading futures on individual stocks and create indices for their markets.

How is EDSP Calculated?

Each exchange has its own method for calculating the EDSP. For some, it's a fixed rate determined by a third party. Others use more complex calculations that involve averaging out the range of prices traded on the final day of the contract.

For instance, the London Stock Exchange conducts intraday auctions for shares within the FTSE 100 index, following a transparent process that averages the most traded prices. This average helps determine the final EDSP for the contract.

EDSP in Specific Markets

• EURIBOR: For Euribor futures, the EDSP is based on rates set daily by the European Money Markets Institute at 11 am CET.
• FOREX: On the Chicago Mercantile Exchange (CME), Eurodollar futures contracts use rates from 16 interdealer banks, and the average is calculated after discarding the highest and lowest values. A similar process applies for currency (FX) futures, with the EDSP based on trades within a specific 30-second window.
• Commodities: In WTI crude oil futures, the EDSP is determined using the penultimate settlement price of crude oil on the New York Mercantile Exchange (NYMEX).
• Stock Indices: The CME uses a unique opening quotation on the final trading day for US stock indices like the S&P 500 and NASDAQ. Due to the staggered opening of stocks, the final EDSP might take some time to calculate and can remain active for up to 30 minutes after the market opens.

How to Find EDSP Information?

For most traders, calculating the EDSP manually is challenging due to the vast amounts of price data involved. However, large financial institutions often have the resources to replicate these calculations.

Most exchanges provide information about their EDSP calculation methods, and the data collection times on their websites. For individual traders, this information can help guide trading decisions, particularly around contract expiry, where price volatility may increase.

Traders may also consider rolling over their positions to the next contract before expiry to avoid potential market distortions caused by large players shifting positions.

In summary, the EDSP is a vital part of settling derivative contracts, ensuring that buyers and sellers meet their obligations fairly. Understanding how it works can help traders navigate markets more effectively, especially around contract expires.