How does cash settlement work and why should investors use it?
but rather transfers the accompanying cash position when the contract expires or is exercised.
When a Futures and Options contract expires or is executed, the owner of the contract has the theoretical option of delivering the physical commodity or transferring the. This is referred to as physical delivery, and it is far more time-consuming than a cash settlement. A contract is formed with another buyer who is betting on the opposite side of the coin, that corn prices will rise.
The investor, on the other hand, loses $2,000 if the cost of 200 bushels of corn rises to $12,000. In theory, the 200 bushels of corn are "delivered" to theA cash settlement could be employed to make it simpler. Instead of sending the corn, the short investor must pay the gap of $12,000 - $10,000, or $2,000, if the value rises to $12,000. If the price falls to $8,000, the buyer receives $2,000 from the long position holder.
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