Define “Price Slippage” in the Context of Derivatives Settlement.
Price slippage is the difference between the expected price of a trade and the price at which the trade is actually executed. In the context of physical settlement, slippage occurs if the forced buying or selling of the underlying asset to meet the delivery obligation pushes the market price unfavorably, especially for large positions or illiquid assets.
Cash settlement typically calculates based on a reference price, mitigating this direct market impact.
Glossar
Forced Buying
Liquidation ⎊ The phenomenon of forced buying, particularly acute within cryptocurrency derivatives and options markets, arises from margin calls triggered by adverse price movements.
Large Positions
Exposure ⎊ Large positions represent significant market exposure to a particular asset or derivative contract.
Underlying Asset
Futures Pricing incorporates the cost of carry, which in crypto markets includes funding rates derived from perpetual swap markets and the time value associated with holding the spot asset.
Cash Settlement
Settlement ⎊ Cash settlement, within cryptocurrency derivatives and options trading, represents the fulfillment of a contract obligation through a monetary exchange rather than physical delivery of the underlying asset.
Expected Price
Price ⎊ Within cryptocurrency derivatives, options trading, and financial engineering, price represents the prevailing market valuation of an underlying asset, reflecting a complex interplay of supply, demand, and anticipated future performance.
Delivery Obligation
Transfer ⎊ The delivery obligation, within cryptocurrency derivatives, options trading, and broader financial derivatives, represents the legally binding requirement for one party to convey an underlying asset or its equivalent value to another party.