Why is the cash settlement value of my futures contract different from the index level at the close on the last trading day?
The futures settlement price is based on the opening price of each stock in the underlying index on the morning of the maturity date. As the stocks in the index open, the first traded price of each stock is recorded. Once all stocks in the index have opened, an index calculation is made using these opening prices. This settlement value is likely to be different from the index level at the close on the previous day, which is the last trading day. This method, used by several major exchanges internationally, is regarded as an effective way to manage volatility often associated with the maturity of index futures contracts. Because the Australian market staggers the opening of stocks, it is not possible for the entire market to be traded in one ‘hit’ during the opening period. Traders who are concerned about a significant move in the market overnight may choose to close out their futures position before the close of trade on the last trading day.
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