Cash Settlement
A derivatives settlement method in which the profit or loss is paid in cash rather than by delivering the underlying asset.
What is Cash Settlement?
Cash settlement is a method of resolving a futures or options contract at expiration by paying the net gain or loss in cash, rather than physically delivering the underlying asset. At settlement, the contract is marked to the final settlement price — typically the spot price or index value on expiration day — and the party with a losing position transfers cash to the party with a winning position. Cash settlement is used when physical delivery is impractical (e.g., stock index futures, weather derivatives, and some interest rate products) or when the parties prefer not to handle the underlying commodity. Most equity index futures and options settle in cash.
Example
A trader who is long 10 S&P 500 futures contracts at a price of 5,000 holds through expiration when the index settles at 5,120. The gain is 120 index points × $50 per point × 10 contracts = $60,000, paid in cash by the clearinghouse to the trader's margin account. No actual purchase of the 500 S&P 500 stocks takes place.