What is a 'Cash Contract'

A cash contract is a financial arrangement that requires delivery of a particular amount of a specified commodity on a predetermined date. A cash contract is closely related to, but should not be confused with, a futures contract where trading positions are usually closed out in cash prior to delivery of the commodity. Futures traders are often hedging or speculating on price movements to manage risk or turn a profit, and are not actually interested in physically owning the commodities.

BREAKING DOWN 'Cash Contract'

There are other important differences between cash contracts and futures contracts. A cash contract creates a direct obligation between the buyer and the seller, whereas a futures contract obliges each party to an exchange's clearinghouse. In this sense, a cash contract is much closer to a forward contract, which is a customized contract between two parties to buy or sell an asset at a specified price on a future date. Also, a cash contract can be drawn up for any amount that a buyer and seller can agree on, whereas a futures contract must be written for a predetermined, standardized quantity and quality allowed by the exchange.

Cash Contracts for Deliverable Commodities

Cash contracts convey important information regarding current market transactions. For example, cash contracts specify the quantity and the amount paid for commodities on the spot market, where large manufacturers commonly purchase the commodities they need for production in their factories. These manufactures are not speculating on the price of the commodities they need, which can be done in the futures market. Instead, they are physically purchasing the raw materials they need for their manufacturing process. Commodities are physical products that are generally indistinguishable no matter which company brings them to the marketplace. Examples include corn, crude oil, gasoline, gold, cotton, beef and sugar.

Cash Contracts Are Highly Customizable

There are many different ways to trade commodities and financial instruments. The most popular way is between banks themselves in a practice called "over-the-counter" (OTC) trading because the transaction occurs between the institutions directly and not on a regulated exchange. This allows the parties involved to specify the terms of trade such as the quantity, quality, date and location of the commodity delivery. This can be highly advantageous for both producer and consumer. Consumers have the ability to specify the exact amount of raw material that is required in the manufacturing process, which prevents waste or shortages. Producers also benefit because they may be able to sell a larger quantity than would be the case with standardized futures contracts.
 

RELATED TERMS
  1. Cash Price

    The cash price is the actual amount of money that is exchanged ...
  2. Physical Delivery

    Physical delivery is a term in an options or futures contract ...
  3. Actuals

    The physical commodity that underlies a futures contract or is ...
  4. Forward Contract

    A customized contract between two parties to buy or sell an asset ...
  5. Last Trading Day

    The last trading day is the final day that a futures contract ...
  6. Against Actual

    An order between two traders looking to hedge their positions, ...
Related Articles
  1. Investing

    Commodity Investing 101

    From the orange juice we drink to the gas we use to power our vehicles and heat our homes, commodities play important roles in our daily lives.
  2. Trading

    The Difference Between Forwards and Futures

    Both forward and futures contracts allow investors to buy or sell an asset at a specific time and price.
  3. Trading

    Beginner's Guide To Trading Futures

    An in-depth look into what futures are, and how you can build a solid base to begin trading them.
  4. Investing

    Commodities trading: An overview

    Learn how even non-professional traders can participate in the commodities markets.
  5. Investing

    All About Liquid Commodities

    You might hear 'liquid commodities' and think of an auction, but they're actually a high-volume, fast paced financial product suitable for day traders.
  6. Investing

    What is a Forward Contract?

    A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date.
RELATED FAQS
  1. How do I learn technical skills for trading commodities?

    Learn what resources are available to learn about trading commodities, and understand some of the differences between stocks ... Read Answer >>
  2. Forward Contracts vs. Futures Contracts

    While both forward and futures contracts allow people to buy or sell a specific asset at a specific time at a given price, ... Read Answer >>
  3. What is the difference between an options contract and a futures contract?

    Both futures and options trading are considered advanced forms of market trading, and require additional training or the ... Read Answer >>
Hot Definitions
  1. Treasury Yield

    Treasury yield is the return on investment, expressed as a percentage, on the U.S. government's debt obligations.
  2. Return on Assets - ROA

    Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
  3. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  4. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  5. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  6. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
Trading Center