Meaning
Settlement method for London Metal Exchange contracts using cash instead of physical delivery. Parties using lme cash settlement avoid the costs of transporting and storing industrial metals. This process relies on the difference between the initial trade price and the final market price.
Price Discovery
Daily auctions on the exchange floor determine the value used for these payments. Through lme cash settlement, traders can hedge against price fluctuations without ever touching a bar of aluminum or copper. Market participants watch these numbers closely to set their own commercial rates.
Market Volatility
Rapid changes in supply or demand cause the settlement value to swing between trading sessions. Because lme cash settlement reflects current global conditions, it helps to balance the expectations of buyers and sellers. Speculative activity can increase the speed of these movements.
Risk management teams use stop loss orders to limit their exposure to these sudden shifts. Hedging becomes more expensive when the market is unstable.
Counterparty Exposure
Financial stability of the trading partner is verified by the clearing house to ensure that all debts are paid. Using lme cash settlement removes the risk of receiving low quality physical metal. Security deposits are adjusted daily to match the current market value of the contract.
