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Cash settlement

Cash Settlement is a method of settling forward contracts or futures contracts by cash rather than by physical delivery of the underlying asset. The parties settle by paying/receiving the loss/gain related to the contract in cash when the contract expires.
In forward or future contracts, the buyer agrees to purchase some asset in the future at a price agreed upon today. In physically settled forward and future contracts, the full purchase price is paid by the buyer, and the actual asset is delivered by the seller. For example: Company A enters into a forward contract to buy 1 million barrels of oil at $70/barrel from company B on a future date. On that future date, Company A would have to pay $70 million to company B and in exchange receive 1 million barrels of oil.
However, if the contract was cash-settled, the buyer and the seller would simply exchange the difference in the associated cash positions. The cash position is the difference between the spot price of the asset on the settlement date and the agreed upon price as dictated by the forward/future contract. Continuing from the example above, if on the settlement date the price of oil was $50 per barrel, the buyer, instead of paying the seller $70 million, would pay him $20 million. This is the difference between the price of 1 million barrels on that day and the agreed upon price -- and the seller would not deliver any oil to the buyer. If, on the other hand, the price of oil was $80 per barrel, the seller would pay the buyer $10 million in cash and deliver no oil.
It may seem confusing as to why the cash position is the difference between the spot price at settlement and the agreed upon forward/futures price. Using the example above again, consider if the spot price of oil was $50 per barrel, and the contract were physically settled. It would pay the seller $70 million, and received 1 million barrels in return. However, the market value of the oil is only $50 per barrel, meaning it paid more than the spot (market) price for oil. In other words, if Company A were to sell the oil immediately after it received the oil, it would only receive $50 million, incurring a loss of $20 million. The same principle holds true if the spot price of oil is $80 per barrel at expiry; rather than having a loss, Company A now has a profit. 
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  1. Lolataylor88October 13, 2011 at 1:29 PM

    Waiting for settlement money is such a bummer!!!! During the wait, your medical bills stack up and you financial situation gets worse and none of the blame is yours. Its a good thing that I as able to get Lawsuit Cash . I found a company that specializes in settlement agreements and I was able to get my money fast.

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