If an option provides for cash settlement, you are only entitled to a sum of money
corresponding to the difference between the strike price and the current market value
of the underlying asset.
How is the transaction
If you do not close out the contract prior to the expiration date, you and the counterparty
must settle it.
If the underlying in your contract is a physical asset, settlement is achieved by physical
delivery or a cash payment. Generally, the asset is physically delivered. Only in
exceptional cases do the contract provisions or stock exchange practice call for cash
settlement. All other fulfilment specifications, especially the definition of the place of
fulfilment, can be found in the relevant contract provisions.
The difference between physical delivery and cash settlement is that with physical
delivery, underlyings amounting to the entire contractual value must be delivered,
whereas with cash settlement, only the difference between the agreed price and the
market value on settlement needs to be paid. This means that you need more funds
available for physical delivery than for cash settlement.
With commodity futures, you may receive physical delivery of the commodity concerned
on expiration, while structured products normally provide for cash payment.
If you prefer cash settlement, you will have to sell the futures before their expiration
date. Such products are therefore more risky than, for instance, equities or collective