Prompt Date
In commodity and foreign exchange markets, the prompt date (also called the value date or delivery date) is the date on which a contract calls for the actual delivery of the underlying commodity or the exchange of currencies, representing the settlement date when the contracted transaction is consummated. For spot commodity transactions, the prompt date is typically two business days following the trade date; for futures and forward contracts, it is specified in the contract terms.
Key takeaways
- The prompt date defines when physical delivery of a commodity or settlement of a foreign exchange transaction occurs, distinguishing spot transactions (prompt in 2 business days) from forward or futures contracts (prompt on the contract delivery date).
- In base metals trading on the London Metal Exchange (LME), the standard spot transaction settles on the 'cash' date two business days forward, while futures contracts specify monthly or weekly prompt dates out to several years.
- The basis—the difference between spot price and futures price—narrows as the futures contract approaches its prompt date, converging to zero at delivery.
- Prompt month refers to the nearest delivery month in a futures contract series, representing the most actively traded and liquid contract reflecting current market supply and demand conditions.
- Roll yield in commodity futures strategies arises from the price difference between the expiring prompt contract and the next contract to become prompt, which can be positive (backwardated markets) or negative (contangoed markets).
Explanation
The prompt date is a foundational concept in physical commodity trading and foreign exchange markets that defines when contractual obligations must be fulfilled. In the LME (London Metal Exchange) system, which is the world's largest metals exchange, the prompt date structure is particularly elaborate: spot (cash) transactions settle two business days forward; 'tom-next' transactions settle one business day forward; and forward contracts specify a broad array of weekly and monthly prompt dates stretching out three months (daily prompts), then monthly to 63 months (aluminum) or shorter periods for other metals. This granular date structure reflects the needs of physical producers and consumers who need to manage inventory and delivery timing with precision.
For commodity futures markets more broadly—NYMEX crude oil, CME corn, ICE Brent—the prompt date is the first delivery date of the front-month (nearest) contract. As a contract approaches its prompt date, it transitions from primarily speculative trading to increasingly physical delivery activity. Open interest declines sharply in the weeks before delivery as speculators roll their positions to the next contract month, avoiding the obligation to deliver or take delivery of the physical commodity. The transition from one prompt contract to the next is called the 'roll,' and its execution cost (roll yield) is a significant component of commodity futures returns.
In foreign exchange markets, the prompt date concept manifests through the standard value date conventions that govern spot and forward transactions. The spot EUR/USD rate is quoted for delivery two business days hence—the prompt date for the spot transaction. Forward FX contracts specify a prompt date beyond spot, with the forward price determined by covered interest rate parity: the difference between the domestic and foreign interest rates for the period between spot and the prompt date determines the forward premium or discount. FX swap transactions exchange spot and forward cash flows, effectively lending or borrowing one currency against another from spot to the prompt date of the forward leg.
The practical significance of the prompt date in risk management relates to settlement risk—the risk that a counterparty will default between the trade date and the prompt date when settlement occurs. For large commodity or FX transactions, this settlement exposure can be substantial: a $500 million FX spot trade has $500 million of settlement risk from trade date to value date. CLS Bank (Continuous Linked Settlement) was created specifically to mitigate bilateral FX settlement risk by using a payment-versus-payment model, ensuring that neither side of the FX transaction is exposed to the other's credit risk during the settlement process.
In structured commodity transactions, the prompt date takes on additional complexity. A gold producer entering a forward sale contracts to deliver 10,000 troy ounces on a specified prompt date six months hence. The exact scheduling of mine production, refining, and transport must align with the prompt date to avoid delivery failures or costly deferrals. Similarly, oil refiners entering crack spread hedges (buying crude oil futures and selling refined product futures) must carefully manage the prompt dates of each leg to ensure proper matching of the hedge to the underlying physical exposure.
Formula
Forward Price = Spot Price × e^(r×T) + Storage Costs (for commodities with positive carry); Prompt Date Basis = Spot Price - Futures Price
Example
A copper trader at a commodity merchant buys 250 metric tons of copper on the LME at $8,750/tonne for value on the cash date (two business days forward—the prompt date). Simultaneously, they sell 250 MT of copper forward on the 3-month prompt date at $8,680/tonne—a contango structure of $70/tonne. On the cash prompt date, they take delivery of the physical copper at the LME warehouse and pay $2,187,500. Three months later, on the forward prompt date, they deliver the copper against their forward sale commitment at $8,680/tonne, receiving $2,170,000. The $17,500 cost of carry (70 × 250) represents the warehousing, financing, and insurance costs for holding the copper for three months—approximately 0.8% of value, consistent with prevailing short-term interest rates and storage costs.
Related terms
Cash Forward Sale Contango Contract Month Cost Of Carry Crack Spread Credit Risk Default Delivery Exchange Gamma Scalping Gold Index Amortizing Swap