What's the difference between cash-settled and physically-settled futures?

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AcadiFi · Accepted Answer

Cash settlement means on expiry the exchange computes the final settlement price and credits/debits the difference in cash. No underlying changes hands. Physical settlement means the short delivers the actual underlying and the long pays and receives it. **Cash-settled examples**: equity index futures (S&P 500, Nikkei 225), most interest-rate futures that reference composite rates (SOFR futures), and weather futures. Delivering an index basket or an abstract rate is impractical, so cash works. **Physically-settled examples**: most agricultural contracts (corn, wheat, cattle), energy (crude oil, natural gas), and metals (copper, gold via COMEX depositories). Treasury bond futures are also physical — the short delivers an actual bond from the eligible basket. ```mermaid flowchart TB A[Futures Expiry] --> B{Settlement
Type} B -->|Cash| C[Mark to Final
Settlement Price] B -->|Physical| D[Short Delivers
Underlying] C --> E[No Delivery
Risk] D --> F[Storage and
Logistics] ``` For risk purposes, cash settlement eliminates squeeze and corner risk and reduces operational complexity. Physical settlement keeps futures prices anchored to the physical market because deliverable supply matters — this is why the short-end of WTI curves can get wild when Cushing inventory tightens. A hedger named Magnus Bergström running a fuel program might prefer cash-settled Brent look-alikes for cleanness, but a refiner who actually wants barrels would trade the physically-settled contract.

What's the difference between cash-settled and physically-settled futures?

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