Futures Dictionary Series: Cash Settlement vs. Physical Delivery
There are two types of settlements for futures contract: cash settlement and physical delivery. In the ninth installment of our Futures Dictionary Series we will explain the difference between the two settlement types.
Cash settlement is a settlement method used in certain futures contracts where you don’t have to make or take delivery of the underlying asset at the expiration of the futures contract. Instead, your account is either debited or credited with cash.
Mostly cash settlement is for futures contract that has non-physical asset as underlying asset. For example, index futures such as FBM KLCI Futures (FKLI), Mini Hang Seng Index Futures (MHI) or CME S&P 500 Futures (SP) are all cash settled.
Physical delivery is a settlement method where you have to make or take delivery of the underlying asset at the expiration of the futures contract. Typically physical delivery is specified in futures contract where the underlying asset is a physical commodity. For example, Crude Palm Oil Futures (FCPO), Soybean Futures (ZS) or NYBOT Cotton Futures (CT) are all specify for physical delivery.
Bear in mind that a futures contract that call for physical delivery may not result in actual delivery itself but there is a chance that traders may be tendered for physical delivery process. Many traders would buy or sell futures contracts prior to the delivery date to realize their profits or loses. These are typically speculators who are in for the money and have no intention of taking actual delivery.
That’s all for today. Remember, learn before you trade.
Have a profitable trading!
Read more of our past Futures Dictionary Series:
1. Futures Dictionary Series: Approved Delivery Facility
2. Futures Dictionary Series: Capital Market Services Representatives (CMSR)
3. Futures Dictionary Series: Actuals
4. Futures Dictionary Series: At The Market
5. Futures Dictionary Series: Back Months
6. Futures Dictionary Series: Futures Spread
7. Futures Dictionary Series: Market Order
8. Futures Dictionary Series: Contract Specifications for Bursa Malaysia Derivatives Crude Palm Oil Futures (FCPO)
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