Exchange Delivery Settlement Price (EDSP)

Exchange Delivery Settlement Price (EDSP) is a price determined by a futures exchange, which is used to settle futures contracts that are due for delivery. In this article, we will explore what EDSP is, how it is calculated, and how it impacts futures trading.

What is Exchange Delivery Settlement Price (EDSP)?

EDSP is the price at which a futures contract is settled when the contract expires and requires physical delivery of the underlying asset. EDSP is typically calculated as the average of the prices traded during a specified period of time, usually on the last day of trading before the delivery period starts.

For example, let's say that a futures contract for crude oil expires on the 20th of the month and requires physical delivery of the crude oil on the 25th of the month. The exchange might determine the EDSP for the contract by averaging the prices at which crude oil trades during the last three trading days before the 20th of the month.

How is Exchange Delivery Settlement Price (EDSP) calculated?

The calculation of EDSP can vary depending on the exchange and the underlying asset being traded. Some exchanges use a weighted average of prices over a specified period of time, while others use a volume-weighted average price (VWAP) or a simple average of prices over the specified period.

For example, the Chicago Mercantile Exchange (CME) uses a VWAP calculation to determine the EDSP for its Eurodollar futures contract. The VWAP calculation takes into account the prices at which contracts were traded and the volume of contracts traded during a specified period of time.

Why is Exchange Delivery Settlement Price (EDSP) important?

EDSP is important because it determines the final settlement price for futures contracts that require physical delivery of the underlying asset. Traders who hold futures contracts until expiry must be prepared to deliver or take delivery of the underlying asset at the EDSP.

The EDSP can also impact the price of the underlying asset itself. For example, if the EDSP for crude oil futures is higher than the current market price for crude oil, it may incentivize oil producers to hold onto their oil and wait to sell it at the higher price. Conversely, if the EDSP is lower than the current market price, it may incentivize buyers to purchase more oil than they need, anticipating that the price will rise in the future.

Conclusion

Exchange Delivery Settlement Price (EDSP) is a crucial aspect of futures trading, particularly for contracts that require physical delivery of the underlying asset. The EDSP determines the final settlement price for these contracts and can impact the price of the underlying asset itself. Understanding how EDSP is calculated and how it can impact trading decisions is essential for futures traders.