Definition of Cash settlement:
For example, the purchaser of a cash-settled cotton futures contract is required to pay the difference between the spot price of cotton and the futures price, rather than having to take ownership of physical bundles of cotton. This is in contrast to physical settlement, where delivery of the actual underlying instrument(s) does take place.
A cash settlement is a settlement method used in certain futures and options contracts where, upon expiration or exercise, the seller of the financial instrument does not deliver the actual (physical) underlying asset but instead transfers the associated cash position. For sellers not wishing to take actual possession of the underlying cash commodity, a cash settlement is a more convenient method of transacting futures and options contracts. Cash-settled contracts are one of the main reasons for the entry of speculators and, consequently, more liquidity in derivatives markets.
A process in which a futures or option contract is settled with an exchange of money rather than the delivery of the physical commodity. Financial instruments use a cash settlement process.
How to use Cash settlement in a sentence?
- Cash settlement has enabled investors to bring liquidity into derivative markets.
- Cash-settled contracts require less time and costs to deliver upon expiration.
- Derivative trades are settled in cash when physical delivery of an asset does not take place upon exercise or expiration. Instead the contract is settled in cash.
Meaning of Cash settlement & Cash settlement Definition