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Futures contracts are purchases or sales of goods for a specified delivery date in the future at prices established today. On the futures market the goods that underlie 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 delivery of these goods take place, then the futures contract becomes a physical contract. In the main this does not happen. Futures contracts are usually cancelled out by an equal and opposite contract: buy/sell back. This is because futures trading is about price. Sometimes, it is solely about price, buying low/selling high, but usually it’s about price risk 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. With the exception of LMEmini and LMEX contracts, which do not have a daily prompt structure, the latest point in time a position can be closed on the LME is 12:30pm the day before the prompt date.
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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