Cash Settlement

DEFINITION of 'Cash Settlement'

A settlement method used in certain future and option contracts whereby, upon expiry or exercise, the seller of the financial instrument does not deliver the actual but transfers the associated cash position.

BREAKING DOWN 'Cash Settlement'

For sellers not wishing to take actual possession of the underlying cash commodity, cash settlement is a more convenient method of transacting futures and options contracts. For example, the purchaser of a cotton future that is cash settled, rather than being required to take ownership of physical bundles of cotton, pays the difference between the spot price of cotton and the futures price.

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