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Why do parties use cash settlement?

Cash settlement is useful and often preferred because it eliminates much of the transaction costs that would otherwise be incurred when physically delivering a good. For example, a futures contract on a basket of stocks such as the S&P 500 (SPX) will always be cash settled because of the inconvenience, impracticality, and extremely high transaction costs associated with delivering shares of all 500 companies. Because the costs associated with cash settled contracts are lower, it appeals to both hedgers and speculators.
Cash settlement also helps reduce credit risk for futures contracts. When entering into a futures contract, each party must deposit money into a margin account where gains and losses are paid into or taken out of. Futures contracts are cash settled daily and gains/losses are received/paid each day, eliminating the chance that a party will be unable to pay.
Most forwards and futures on financial assets are cash settled. For instance, forward rate agreements, which are forward contracts on an interest rate, are always cash settled because the underlying is an interest rate, which is not physically deliverable. Commodities, while often physically settled, can also be cash settled as long as an observable, undisputed measure of the spot price is agreed upon beforehand. Cash settling commodities lets companies reduce the cost of hedging. 
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