GAEA Bitcoin Contract Interpretation — Understanding Delivery Settlement Price
GAEA Investment Research Center — For most investors, when their contract is about to expire, they will choose to close or shift their contract position, instead of bringing the contract to the day when it expires on itself. Hence, most of the partners may not notice the importance of the delivery settlement price. Yet, the delivery settlement price is very important in a contract, as it is the actual hero behind the scenes.
In this issue, we will discuss about the delivery settlement price of the contract.
- If you would buy 100 GAEA Bitcoin contracts for September delivery at 7,000 USDT; and they are still unopened until the last trading day (the delivery date). How will these 100 contracts be handled?
Similarly with traditional futures, contracts that are due to be closed will enter the delivery, by acknowledging its closed positions.
The GAEA trading platform calculates the profit and loss with its settlement price at the end of the BTC contract period. Then, it concludes the BTC contract in cash, with its currency calculated in BTC.
It is wise for you to find out about the delivery settlement price, as it is an important variable in the delivery process. This process is also closely related to the delivery profit. Hence, it is crucial to understand about how the delivery settlement price was determined.
2. So, how does the GAEA trading platform determine the delivery settlement price?
Since it is a BTC contract, the price follows the BTC price.
We use the average of BTC/USDT prices of the 5 exchanges (OkEx, Binance, Huobi, Bitfinex, HitBTC) to compile the BTC price index. This way, the impact in an abnormal market exchange of the contract can be overcome.
In order for the price of our BTC contract to follow the spot market, we need to determine the settlement price based on the index price. We can conclude that the settlement price is the bridge between the contract price and the spot price. A reasonable settlement price guarantees the convergence of the contract price to the spot price. On the other hand, an unreasonable settlement price will make the contract price and the spot price deviate significantly.
The GAEA trading platform uses the average price of arithmetic spot index on its delivery time, 15:30–16:00 (UTC+8) as the settlement price. This is to ensure convergence of the contract price to the spot price.
3. You might wonder: “Why do I have to average the price of an index? Isn’t it easier to settle directly with the latest price of the index?”
If we simply use the last transaction price on the delivery date as the delivery settlement price, then it is inevitable for some investors to think that they only need to affect the spot price immediately before the delivery, in order to bring more contractual profit for the contract. (since contractual transactions use leverage, under the right conditions, and the profit on the contract can cover the input cost on the spot.)
Referring to the above statement, if we would buy the spot at the last minute on its expiration date and raise the last transaction price to 7,200 USDT, the delivery profit of the 100 contracts previously purchased at 7,000 USDT will increase.
As for now, you should somewhat understand that the GAEA trading platform uses the average price of the arithmetic spot index on its delivery time, 15:30–16:00 (UTC+8) as the delivery settlement price.
First of all, to compare the effects of the latest transaction price, the average price that affects the period of time requires more cost. Secondly, since our index takes the average of the 5 exchange prices, the index price is not easily influenced.
In summary, the method of determining our settlement price can guarantee the contract price converges to the spot price. Also, it greatly increases the difficulty of speculative forces in attempting to affect the delivery settlement price, which can ensure our contract transactions to run smoothly.
We hope that everyone have a general understanding of the settlement price for now.
If you liked this article, send us a clap below. Our next article will discuss GAEA’s Contract Interpretation in Mark Price. Stay tuned!
Join our Telegram group here to be alerted: https://t.me/GAEATrading
