Cash settlement

Cash settlement is a way of closing a futures contract at expiry by paying the difference between the contract price and a reference price in cash, no commodity changing hands.

Not every futures contract is practical to settle with an actual shipment of the underlying commodity; some reference things that cannot be delivered at all, while others simply attract too many traders with no interest in handling the physical goods to make delivery workable for everyone. Cash settlement solves this by paying the difference between the contract’s price and a specified reference price in cash at expiry, with no commodity changing hands.

Some commodity contracts use cash settlement against an independent benchmark price precisely so that traders with no ability to store or handle the physical commodity can still hold a position through expiry without needing to close it out beforehand. This differs from physical delivery contracts, where holding to expiry means being ready to send or receive the actual commodity.