Cash-Settled vs Asset-Settled Futures: Expiry and Replication Costs

Summary

This explainer distinguishes futures by how they settle at expiry. Cash-settled contracts credit or debit profit and loss against a reference price, while asset-settled contracts require delivery of the underlying asset and payment of the contract value. The article argues that cash settlement lets traders avoid delivery logistics and can allow positions to expire without closing or rolling, whereas physical delivery requires traders who do not want the asset to exit or roll ahead of the notice date. It cites historical open-interest observations to illustrate that many positions remain open near expiry and that only a small share of traditional futures reaches delivery.

The central economic argument concerns the cost of replicating the settlement price through spot markets. Where spot trading is accessible and inexpensive, cash settlement can be replicated with a hedge and incurs trading fees; where those costs are high or venues are inaccessible, physical delivery may be preferable. The comparison is conceptual and market-dependent, and the examples reflect the venues and practices described in the article.

Key ideas

• Cash settlement transfers profit or loss at expiry without requiring delivery of the underlying asset.
• Asset settlement requires the long and short sides to exchange the contract’s underlying asset and payment.
• Traders who cannot accept delivery must close or roll asset-settled positions before the relevant deadline.
• Settlement-price replication is cheaper when liquid spot venues are accessible and fees are low.
• The article argues that the settlement method does not change the basic futures exposure or the spot hedge used by an arbitrageur.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.