time in the contract settlement month the contract stops trading,
and a price is determined by the exchange for settlement of the contract.
A party to a futures contract has two choices on liquidation of the position.
First, the position can be liquidated prior to the settlement date.
For this purpose, the party must take an offsetting position in the same
contract. For the buyer of a futures contract, this means selling the same
number of identical futures contracts; for the seller of a futures contract,
this means buying the same number of identical futures contracts.
The alternative is to wait until the settlement date. At that time the
party purchasing a futures contract accepts delivery of the underlying;
the party that sells a futures contract liquidates the position by delivering
the underlying at the agreed-upon price. As explained later, for a
stock index futures contract, settlement is made in cash only.
A useful statistic measuring the liquidity of a contract is the number
of contracts that have been entered into but not yet liquidated. This figure
is called the contract’s open interest. An open interest figure is reported by
an exchange for all the futures contracts traded.
Read More : Liquidating a Position
