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Cash settlement is a process used in financial markets to settle a transaction without the physical delivery of an underlying asset. The payment is instead made in cash. Cash settlement is commonly used in derivative trading, such as futures, options, and swaps, where the buyer and seller settle the difference of the contract price and the spot price in cash at the time of settlement.
Traders of derivatives opt for cash settlement because it simplifies the process of closing out contracts. Instead of exchanging the underlying asset, the buyer and seller can simply exchange the cash value of the asset at the time of settlement. This is particularly useful when trading commodity derivatives such as crude oil, wheat, natural gas, and more, as it can greatly reduce the cost and complexity of physical delivery. This allows investors to participate in markets more easily and reduces the counterparty risk involved in trading.
An investor purchases a futures contract to buy 100 barrels of Brent Crude for $50 per barrel. At the contract’s expiry date, the market price is $58 per barrel. Instead of exchanging the 100 barrels of oil physically, the investor would receive a cash payment of $800 based on the price difference for each barrel of oil. Conversely, if the price of oil falls to $45 per barrel at the contract’s expiry date, the investor would have to pay $500 in cash.
ADSS offers a range of global markets for traders, with opportunities in indices, commodities, forex, equities and more. We also feature tutorials, how-to guides, and weekly webinars to help you navigate the financial markets and find better trading opportunities. You can start trading and investing online by opening a live trading or demo trading account.
Investing in CFDs involves a high degree of risk that you will lose your money due to the use of leverage, particularly in fast moving markets, where a relatively small movement in the price can lead to a proportionately larger movement in the value of your investment. This can result in loses that exceed the funds in your account. You should consider whether you understand how CFDs work and you should seek independent advice if necessary.
ADS Securities LLC (“ADSS”) is authorised and regulated by the Securities and Commodities Authority (“SCA”) in the United Arab Emirates as a trading broker for Over the Counter (“OTC”) Derivatives contracts and foreign exchange spot markets. ADSS is a limited liability company incorporated under United Arab Emirates law. The company is registered with the Department of Economic Development of Abu Dhabi (No. 1190047) and has its principal place of business at 8th Floor, CI Tower, Corniche Road, P.O. Box 93894, Abu Dhabi, United Arab Emirates.
The information presented is not directed at residents of any particular country outside the United Arab Emirates and is not intended for distribution to, or use by, any person in any country where the distribution or use is contrary to local law or regulation.
ADSS is an execution only service provider and does not provide advice. ADSS may publish general market commentary from time to time. Where it does, the material published does not constitute advice, or a solicitation, or a recommendation to a transaction in any financial instrument. ADSS accepts no responsibility for any use of the content presented and any consequences of that use. No representation or warranty is given as to the completeness of this information. Anyone acting on the information provided does so at their own risk.
