Cash Settlement

“Cash Settlement is a method of hedging currency/commodity rates fluctuations by companies for a future contract or forward contract”.

Cash Settlement is a method of settlement for a transaction supposed to occur at a later date. The exchange of commodities is not evident in cash settlement as this is only a method to hedge the upcoming currency and inflation risk by companies.

Cash Settlement

Cash Settlement is a type of agreed upon cash payment for a future or forward contract where the difference between the agreed spot price of the commodities at the time of entering the contract and the market value of the same commodities at the actual transaction date is paid by the party suffering a loss regardless of the fact that actual goods are physically delivered to the buyer from the seller.

Cash Settlement is a form of settlement for a forward or future contract which works on the basis of cash position. In Cash Settlement the customers and vendors enter into an agreement in which an on the spot purchase price for commodities is decided. It is decided that at a future date the contract will expire and the market value of the commodities at the date of contract expiry will be recorded. Now the difference in on the spot commodities price and the price of commodities at the date of expiry are matched and the difference is to be paid the party which suffers a loss.

The Advantages of Cash Settlement:-

• As the Actual Physical Delivery of the Commodity is not mandatory so it is flexible for business organizations with trust worthy vendors.
• It reduces the credit risk as on entering the contract both the parties deposit the value of purchase price into a margin account where the difference in the amount is funded by a broker on which an interest rate is levied to be paid once the debt of broker is outstanding.




In Physical Settlement the commodities have to be delivered from the vendor to the customer in physical form at the agreed purchase price while on cash settlement it is not compulsory that the tangible goods are delivered to the buyers while only the difference in cash position is to be repaid by the party incurring a loss.