What is a cash settlement?

A cash settlement is a method of settling a future contract by cash instead of the physical delivery of an asset. This is a convenient method of transacting future contracts, states Investopedia.

When a buyer agrees to purchase a product or service in the future at a price agreed upon at the date of the deal, he can settle the contract by exchanging the difference in the associated cash positions instead of receiving the actual product or service. This eliminates the cost that the parties would incur for delivering a commodity. Examples of cash settlements include options contracts for indices, according to InvestorWords.