Definition
Cash settlement means a derivative ends with a payment of the price difference between the parties. Physical delivery means the seller hands over the actual underlying asset and the buyer pays the full contract price.
A derivative is a contract whose value comes from another asset, such as a commodity, an index or a currency. The settlement method is fixed in the contract specification before anyone trades it.
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Formal definition
In exchange rules, a cash-settled contract is closed at the expiry date against a final settlement price. That price is set by a published method, such as an index value, an average of trades in a closing window, or a special opening quotation. Each open position gets a credit or a debit, and the contract ceases to exist.
A physically settled contract creates a delivery obligation. Holders who stay in the contract past the last trading day enter the delivery process. The short side issues a delivery notice. The asset moves through approved warehouses, depositories or accounts. The clearing house matches buyers and sellers and guarantees the exchange of asset for cash. See clearing and settlement for that wider process.
Worked example (hypothetical)
A trader buys a crude oil future at price P. The contract size is C barrels. The trader holds the contract into expiry.
| Cash-settled version | Physically settled version | |
|---|---|---|
| At expiry | The exchange publishes the final settlement price S | The seller must deliver C barrels at an approved location |
| What the buyer receives | (S − P) × C, paid in cash if S is above P, charged if S is below P | The oil itself, against payment of P × C |
| What happens next | Nothing. The position is closed | The buyer must store, transport or resell the oil |
The price result is the same in both columns. The obligations are very different. This is why most speculators close or roll physically settled positions before the delivery period. They often move from the front month to the next contract.
Where the term appears
- Contract specifications on exchange websites list "Settlement: cash" or "Settlement: physical delivery". They also show the delivery months and the first notice day.
- Broker platforms and statements show expiry dates, and on some products automatic closing before delivery.
- News covers "physical delivery futures" for oil, metals or grains, especially around expiry. Delivery pressure can affect the gap between near and later contracts. See contango and backwardation.
In Pakistan, futures trade under Securities and Exchange Commission of Pakistan (SECP), with trading in listed securities and commodities only via SECP-licensed securities and futures brokers.
Edge cases experienced traders check
- Options settle into another instrument. Some call options on futures become a futures position when exercised, not cash or the commodity.
- Index products cannot be delivered in practice, so stock index futures and options are normally cash settled.
- Non-deliverable forwards are cash-settled forward contracts used for currencies with restricted convertibility.
- CFDs and retail spot forex do not deliver the asset. They are closed or rolled, with swap charges or credits. Leveraged CFD and forex positions can lose money quickly.
- Final price risk. With cash settlement, the settlement price method decides your result, and it can differ from the last price you saw on screen.
Related terms
Commodity, counterparty, futures roll, expiry date, risk management, and the full trading glossary.
Frequent questions
What is cash settlement in simple words?
The contract ends with a money payment of the price difference. No asset changes hands.
Can a small trader end up receiving physical delivery?
On a physically settled exchange future, yes, if the position is held into the delivery period. Many brokers close such positions in advance. Check your broker's rules.
Is cash settled vs physically settled a difference in profit?
The price gain or loss is the same. The difference is in the obligations, the costs of handling the asset and the settlement price method.
Are CFDs physically settled?
No. A CFD is a contract on the price difference, so the underlying asset is never delivered.