Futures trading, the buying and selling of commodity contracts in a market, is an industry in which agreements can be settled in one of two ways. Either there is physical delivery of an underlying asset in a futures contract, or the agreement is settled for cash in what's known as a cash settlement. Detailed in every futures contract is its last trading day, or the date on which the contract expires. This date is the last day the two parties in a trade can settle a contract for cash rather than go forward with the physical delivery of an asset. Essentially, the last trading day is the date on which all trading stops in a contract.
Futures contracts are agreements between buyers and sellers that expire at a future date and are sold based on an agreed-upon price. An underlying asset in a futures contract determines the value of that agreement. These assets might be agricultural commodities such as grains and wheat, livestock such as hogs or metals such as gold. Energy commodities, including oil and gas, also can be the underlying physical commodities in a futures contract.
In a large portion of futures trades, the buyer and seller never exchange the commodity asset. This is because most of the time, futures traders agree on a monetary settlement on or before the last trading day. In the event that a contract is cash settled, a trader's account with a futures exchange is either credited or debited based on the profit or loss in a trade. This value is determined based on the market price for a commodity. If the market price for an commodity is higher than the value of a futures contract on the last trading day, for instance, a seller loses some money on that trade, and his or her account is debited accordingly.
The last trading day is a component of futures trading of which all traders are aware. Even though most contracts are settled for cash before this date, trading can still be heavy on this day. This is in part because some futures contracts expire on a standard trading day.
Stock indexes, for instance, are a type of financial instrument that can determine the value of a futures contract. These particular contracts expire on every third Friday of the month on the Chicago Mercantile Exchange Group in the United States. In the event that futures traders choose to hold a contract beyond the last trading day, they will receive actual delivery of the product.