Definition: Just as the name implies, the date which a contract (normally a derivative contract) expires is called expiry date. All derivative contract based has a date of expiration, whether it is based on underlying security like a commodity, currency or stock; however, there is no expiry date for the underlying security.
A derivative contract which is dependent on underlying security can only exist for a particular period, and this contract comes to an end on the expiry date.
Description: The derivative contract between the buyer and seller is completely settled on the expiry date. The settlement occurs in any of the following ways.
- a. Cash settlement:Instead of the underlying security, exchange of money is used to settle the difference between the spot price and the derivative price. At the moment, cash is used in settling equity derivatives in India.
- b. Physical delivery: For physical delivery of the underlying security attached to a particular contract (which is the norm with commodities), the seller of the contract delivers the quantity to the buyer, who pays completely for it.