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Futures contracts are legal agreements to buy or sell goods for a specified delivery future date at a price agreed today.
On the futures market the goods that form the contract are always at a specific stage of production. On the LME, this is at the semi-processed stage, where the raw material has been turned into an easily handled, non-perishable form such as ingots, cathodes, pellets etc.
If the agreement to buy or sell is not later offset by a corresponding opposite sale or purchase of the material for that same delivery date then the futures contract will need to be settled by the exchange of material. In the main this does not happen. Futures contracts are usually closed out before maturity by an equal and opposite contract: buy/sell back. This is because futures trading usually focuses on price risk management and the offsetting of risk by hedging.
The specified settlement or delivery date of a futures contract is referred to as the prompt date, by which time either the position must be closed or a delivery will take place.
Unlike other commodity markets, which are usually based on monthly prompt dates, most LME futures contracts offer daily and weekly prompt dates. The use of this unique prompt date structure is an important difference between the LME and other futures exchanges.
An important aspect of LME futures contracts is that, with the exception of LMEmini and LMEX contracts, they are not settled until the prompt date. Initial margins and variation margins will be called during the term of a contract and settlement of net positions will result in either receipt or delivery of warrants on the prompt date.
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