Chapter 6 of 8

Expiry, physical settlement and delivery obligations

Distinguish closing a derivative from carrying it into settlement, especially stock and commodity contracts.

3 min read · Original educational chapter

In this chapter

Expiry ends the contract, not every obligation
Identify the direction of delivery
Build a settlement checklist
Decision lab: An expiry plan must name the obligation
Worked example
Common mistakes
Check your understanding

Expiry ends the contract, not every obligation #

An open derivative reaches its final settlement process at expiry. The method is defined by the particular contract. Cash settlement and physical delivery produce very different operational needs. A screen P&L alone does not show every funding or securities obligation.

Index derivatives and individual-stock derivatives must not be treated as identical. Current NSE individual-security options are described as physically settled in the official specifications. Contract documents and broker policies, including any earlier close-out deadlines, must be checked for the exact position.

Identify the direction of delivery #

A long stock future generally corresponds to taking delivery under the applicable physical-settlement rules; a short position corresponds to delivering. For options, exercise and assignment direction depends on call or put and long or short. The options module works through that mapping separately.

Commodity contracts add issues such as delivery location, approved quality, tender periods, vault or warehouse arrangements, taxes and default consequences. Intending to square off is not the same as being certain that a suitable exit will be available.

Build a settlement checklist #

Record the official last trading time, settlement reference, lot size, deliverable obligation, broker cutoff and available cash or inventory. Verify current circulars rather than memorizing a weekday: schedules, auction arrangements and contract terms can change.

Do not assume that a broker will always exit a position successfully on your behalf. Liquidity, price limits or an outage can prevent an intended transaction. A small derivative premium or margin can therefore lead to a much larger settlement issue.

Decision lab: An expiry plan must name the obligation #

Closing a contract, rolling it and holding it to settlement are different actions. Product-specific delivery, exercise and funding rules determine what remains after trading stops. A displayed P&L does not establish that the settlement obligation has disappeared.

Create a dated checklist with the official specification, broker policy, cash, eligible securities or commodity delivery requirements, and a contingency for an unfilled exit. Treat uncertainty about those obligations as a reason to resolve the information gap before holding.

Hypothetical worked example

The funding requirement can dwarf the margin

A fictional physically settled future represents 500 shares at a final reference price of ₹400, giving ₹2,00,000 underlying value. A prior ₹35,000 margin deposit is not itself the cash needed to receive ₹2,00,000 of shares.

A short position needs an appropriate delivery arrangement or securities rather than merely a favorable P&L. Charges, netting rules and broker procedures may affect the final obligation.

This illustration explains the size difference. It is not a statement that every product has the same lot, delivery date or margin amount. Check the current contract and your settlement capacity before the expiry window.

Common mistakes

Assuming all derivatives cash-settle.
Relying on automatic square-off as a guarantee.

Check your understanding

What determines whether a contract requires physical delivery?

Make this chapter useful

Can you defend the reasoning?

Before moving on, answer the self-check in your own words and write why each alternative fails. Use the worked example to test that explanation. Then apply it in the module research task; keep the assumptions and the evidence that could change your answer.

Sources and further reading

Further-reading references from the curriculum source list. Contract sizes, expiry calendars, settlement references, margin parameters and tax treatment can change; verify the current operative documents for the actual product. Worked figures are illustrative, not current quotes.

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General financial education. No securities recommendation, assured outcome or personal advice. Read the risk disclosures.