Fixed-Term Futures Expiry, Cash Settlement, and Contract Rollover
Summary
The document explains how fixed-term futures differ from perpetual futures. Fixed-term contracts expire on a specified date, have no funding-rate mechanism, and may settle in cash or through delivery depending on the contract. In the Kraken examples described, settlement is cash-based: the position closes automatically and the entry-to-settlement price difference is credited or debited. As expiry approaches, arbitrage activity tends to bring futures prices toward spot.
To keep exposure, a trader can roll by closing the expiring contract and opening the next contract cycle. The price gap between the two contracts determines the roll effect: moving into a more expensive contract costs money, while moving into a cheaper one can provide a credit. Traders commonly roll before expiry when the next contract has adequate liquidity. The text is educational rather than a trading test; it offers no performance comparison or precise execution rules, and contract settlement details can vary by product and venue.
Key ideas
- Fixed-term futures expire on a specified date, unlike perpetual contracts.
- A cash-settled contract closes at expiry and credits or debits the settlement-price difference.
- Rolling maintains exposure by closing the expiring contract and opening the next cycle.
- The price gap between contracts makes a roll costly in contango and potentially beneficial in backwardation.
- Arbitrage tends to pull an expiring futures price toward spot, without a funding-rate payment.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.