A cash settlement is a settlement method used in certain futures and options contracts where, upon expiration or exercise, the seller of the financial instrument does not deliver the actual underlying asset but instead transfers the associated cash position. For sellers not wishing to take actual possession of the underlying cash commodity, a cash settlement is a more convenient method of transacting futures and options contracts. For example, the purchaser of a cash-settled cotton futures contract is required to pay the difference between the spot price of cotton and the futures price, rather than having to take ownership of physical bundles of cotton.
