NISM-Series-VIII: Equity Derivatives · Introduction to Clearing and Settlement System

Settlement of Futures and Options Contracts for NISM Equity Derivatives

Updated 11 October 2026 · Fact-checked

Settlement is how futures and options obligations are discharged through the clearing corporation. Futures are marked to market daily in cash, then settled finally at expiry. Option buyers pay premium in cash. In-the-money options are exercised automatically at expiry. Index contracts settle in cash; stock derivatives settle by physical delivery of shares.

Understand Settlement of Futures and Options Contracts

Every futures and options trade is guaranteed by the clearing corporation. Settlement is the process of turning gains, losses and obligations into actual money or shares. It happens in stages.

For futures, settlement starts the day you trade. Each day your open position is revalued at the daily settlement price. The gain or loss is the mark-to-market (MTM) amount. It is settled in cash, with pay-in and pay-out on the next working day. Your position then carries forward at the new price. On expiry, the open position is closed at the final settlement price, which is the closing price of the underlying on the expiry day. Only the last day's difference remains to be settled.

For options, there are two parts. First is premium settlement: the buyer pays the premium and the seller receives it, in cash, on the next working day after the trade. Second is exercise settlement. Index and stock options in India are European style, so they can be exercised only on expiry. In-the-money options are exercised automatically. Out-of-the-money options lapse. The buyer need not give any instruction.

The mode of final settlement depends on the underlying. Index futures and options are cash settled: only the difference in rupees moves. Stock futures and options are physically settled: the seller of a futures contract delivers shares and the buyer pays for them. For an exercised stock option, the call holder pays the strike price and receives shares; the put holder delivers shares and receives the strike price.

Think of it this way: MTM keeps losses from piling up, so the clearing corporation always holds a fresh position. Physical settlement means expiry can end in real shares, so you must have money or shares ready.

Key formulas to remember

Daily MTM on a long futures position: MTM = (Today's settlement price − Previous settlement price) × Lot size × Number of lots; Positive means profit received. For the first day, use the trade price instead of the previous settlement price. For a short position, reverse the sign.
Final settlement of futures: Final MTM = (Final settlement price − Last daily settlement price) × Quantity; Final settlement price is the closing price of the underlying on expiry day. Total profit over the life equals (Final settlement price − Entry price) × Quantity.
Cash settlement of an index option at expiry: Call payout = max(Final settlement price − Strike, 0) × Quantity; Put payout = max(Strike − Final settlement price, 0) × Quantity; The buyer receives this amount and the seller pays it. Premium is settled separately.
Physical settlement of an exercised stock option: Call buyer pays Strike × Quantity and receives shares; Put buyer delivers shares and receives Strike × Quantity; Applies to in-the-money stock options at expiry. The price is the strike, not the market price.
Settlement mode rule: Index derivatives: cash settled. Stock derivatives: physically settled.; Daily MTM and premium are always settled in cash, even for stock derivatives.

How to solve Settlement of Futures and Options Contracts questions

Use this order for any question on settlement of futures and options. It separates the stages that exam options often mix up.

1Identify the instrument: futures or options, and index or stock.
2Identify the stage: daily MTM, final settlement at expiry, premium settlement, or exercise settlement.
3For futures, find the settlement price for each day and compute the difference from the previous reference price, remembering the trade price is the reference on day one.
4Apply the sign: long gains when price rises; short gains when price falls.
5For options, compare the strike with the final settlement price to decide if the option is in the money. If out of the money, it lapses and only the premium matters.
6Choose the mode: cash for index contracts, physical delivery for stock contracts. Use strike price for physical option settlement.
7Check the total: sum of all MTM amounts should equal (final price − entry price) × quantity.
8Match the answer to the exact wording, such as who pays, who receives, or what is delivered.

Quickest way: Stage and mode shortcut

When to use it: Use for theory MCQs and quick calculations when time is short.

Ask two questions: what is the underlying (index or stock) and which stage is it (MTM, premium, exercise or final).
MTM and premium: always cash, next working day.
Index at expiry: cash difference. Stock at expiry: shares change hands.
For total futures profit, skip the daily steps and compute (final − entry) × quantity.
For options, check in the money or out of the money first. Out of the money means zero exercise payout.

Common mistakes in Settlement of Futures and Options Contracts

Saying stock futures are cash settled at expiry because daily MTM is in cash.
Students mix up daily MTM with final settlement.
Fix: Daily MTM is cash for all futures. Only the final settlement differs: cash for index, physical for stock.
Using the previous day's closing price instead of the trade price for the first day's MTM.
The rule is learned as 'today minus yesterday' without the exception.
Fix: On the day of the trade, MTM is settlement price minus the price at which you traded.
Thinking an option buyer must give an instruction to exercise.
Students carry over ideas from other markets or American style options.
Fix: In-the-money options at expiry are exercised automatically. Out-of-the-money options lapse.
Using the market price instead of the strike price for physical settlement of an exercised stock option.
Students see the market price in the question and use it.
Fix: The call buyer pays the strike price per share. The market price only tells you if the option is in the money.
Forgetting premium settlement is separate from exercise settlement.
Both involve option money, so they blur together.
Fix: Premium is paid on the next working day after the trade. Exercise settlement happens at expiry.
Reversing the sign for a short futures position.
Students apply the long formula by habit.
Fix: Write long or short next to the question first. For short positions, a price rise is a loss.

Worked examples

Example 1

An investor buys 1 lot of an index futures contract at 22,000. Lot size is 50 units. Daily settlement prices are 22,060 on day 1 and 22,030 on day 2. The final settlement price at expiry is 22,100. Find each MTM amount and the total profit.

Show the solution

Day 1 MTM = (22,060 − 22,000) × 50 = 60 × 50 = ₹3,000 gain.
Day 2 MTM = (22,030 − 22,060) × 50 = −30 × 50 = ₹1,500 loss.
Final settlement = (22,100 − 22,030) × 50 = 70 × 50 = ₹3,500 gain.
Total = 3,000 − 1,500 + 3,500 = ₹5,000.
Check: (22,100 − 22,000) × 50 = ₹5,000. It matches.

Answer: Total profit is ₹5,000, settled in cash through the daily MTM and the final settlement.

Example 2

A stock call option has a strike price of ₹800 and a lot size of 400 shares. The option is held to expiry, when the underlying closes at ₹850. Stock options are physically settled. What happens to the buyer? (A) Pays ₹3,20,000 and receives 400 shares (B) Pays ₹3,40,000 and receives 400 shares (C) Receives ₹20,000 in cash (D) Nothing, as the option lapses

Show the solution

Check moneyness: a call is in the money when the final price is above the strike. ₹850 is above ₹800, so it is in the money.
An in-the-money option is exercised automatically at expiry.
Stock options are physically settled, so shares are delivered, not a cash difference.
The buyer pays the strike price: 800 × 400 = ₹3,20,000.
Option B uses the market price, which is wrong. Option C is cash settlement. Option D is wrong because the option is in the money.

Answer: (A) The buyer pays ₹3,20,000 and receives 400 shares. The premium was settled earlier.

Exam tips

Look for the words 'index' or 'stock' in the question first. They fix the settlement mode.
In calculation questions, check long or short and the reference price for the first day before computing.
Trap options often mix cash and physical settlement, or premium with exercise settlement. Match each to its stage.
NISM-Series-VIII carries negative marking of 25% of the marks for a question and a 60% pass mark, so skip a question if you are really unsure between two stage-related options.
Remember that settlement and margins are linked: MTM losses are collected in cash, so you need funds every day.

Practice questions from Introduction to Clearing and Settlement System

Settlement of Futures and Options Contracts: frequently asked questions

What is the difference between daily MTM settlement and final settlement of futures?

Daily MTM settles the gain or loss on your open position each day against the daily settlement price. Final settlement closes the position at expiry against the final settlement price, which is the closing price of the underlying on expiry day. Only the last day's difference remains at that point.

What is the difference between cash settlement and physical settlement in F&O?

In cash settlement, only the rupee difference is paid and no securities move. In physical settlement, shares are delivered and paid for. Index derivatives are cash settled; stock derivatives are physically settled.

Do I have to exercise an in-the-money option myself in India?

No. In-the-money index and stock options are exercised automatically at expiry, as they are European style. Out-of-the-money options simply lapse.

When is option premium settled?

Premium is settled in cash. The buyer pays it and the seller receives it on the next working day after the trade. It is separate from exercise settlement at expiry.