What is Cash Settlement?
Cash settlements occur as part of payments relating to futures contracts and also as part of the settlement process in a legal dispute. In general, a cash settlement is simply the process of using cash to settle some sort of outstanding obligation, thus fulfilling the terms of the transaction and allowing the matter to be considered resolved or completed. Upon the cash delivery, both the originator and the receiver involved in the transaction are free to focus on other matters. When it comes to futures trading, the process of using a cash settlement as the mode of payment is common. Essentially, a cash settlement will be extended on the trade date for the security, rather than on the settlement date. This allows the underlier of the security involved with the transaction to retain the underlying asset that formed the basis for the futures or options in the first place. In the matter of legal situations, a cash settlement is often ordered as a means of restitution in the event of a laws
Futures markets use `cash settlement’. Here, the terminal value of the product is deemed equal to the price on the spot market. This is used to determine cash transfers from the counterparties of the futures contract. The cash transfer is treated as settlement. Example: Suppose L purchases 30 units of Nifty from S at a price of Rs. 1,500 on December 31, 2000. Suppose, on the expiration date, December 31, the Nifty spot is actually at 1,600. In this case, L has made a profit of Rs. 100 per Nifty and S has made a loss of Rs. 100 per Nifty. A profit/loss of Rs. 100 per Nifty applied to a transaction of 30 Nifties translates into a profit/loss of Rs. 3,000. Hence, the clearing corporation organises a payment of Rs. 3,000 from S and a payment of Rs. 3,000 to L. This is called cash settlement. Cash settlement was an important advance that extended the reach of derivatives into many products where physical settlement was not viable. How would a seller `deliver’ a market index? On futures mark
