If you are new to investing in the stock market, you must be wondering what is cash settlement. A cash settlement is a method in futures and options trading to settle the contracts at expiry.
In this method, the seller does not deliver the physical underlying asset to the buyer but instead transfers cash. This amount is based on the price difference between the strike price and the current market price of the financial instrument.
Here is an example for better clarity: Say you get into a futures contract with gold as the underlying asset. As per the contract, you need to sell 50 grams of gold at ₹60,000 per 10 grams. On expiry, the market price of 10 grams of gold goes up to ₹65,000. In this case, you can pay the price difference of ₹50,000 as per cash settlement.