Cash settlement

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Cash settlement in derivatives markets occurs when holders of maturing futures and options contracts receive the cash equivalent on settlement - usually the closing price of the underlier on maturation day - rather than actually receiving the underliers as physical delivery.[1]

Cash settlement is the most common method of settling financial futures.[2] Settling derivatives contracts in cash is popular not only with traders and investors but also with businesses wanting to hedge against commodity price movements without buying the commodity. Airlines, for example, may want to lock in present fuel prices without disrupting future relations with contracted suppliers.[3] Some contracts, like those on stock indexes, are generally only cash-settled because of the inconvenience of sending bundles of certificates.

Before 1981 when Eurodollar futures became the first cash-settled futures contract, all futures contracts were physically delivered; today most derivatives products are cash settled.

References

  1. Glossary. CME.
  2. Financial Glossary. Reuters.
  3. Physical Settlement, Cash Settlement. RiskGlossary.