The futures contract or futures trading is an agreement between the buyer and a seller to exchange the underlying asset at the fixed price and the fixed date in the future.
For example, if the buyer is agreeing on the contract in December 2014 to purchase at 5000 bushels of corn and expiry date will be in the middle of December.
Then the seller of December 2014 is making the delivery at that time to the corresponding buyer. So benefits and drawbacks of trading cash-settled futures are available.
If you want to know about the benefits and drawbacks, then stay on this page and read the following content.
What are cash-settled futures contracts?
Before you are going to know about the pros and cons of trading cash-settled futures, you have to know about the basic information about cash-settled futures.
The future contract is representing the actual cash market transaction. Generally, the futures price and the cash price of the futures trading will be tightly closed together.
The relationship between the futures price and the cash price will be like an adhesive which keeps the marketing pricing fair as the efficient one.
However, the futures contracts that are not tied to the asset at expiration are called the cash-settled futures.
Benefits of using cash-settled futures contracts
In the cash-settled futures contracts, the buyer and the seller are not making or taking any delivery of the underlying asset.
In the cash-settled futures contracts, they will agree to accept the cash credit or debit which will result in entry price related to the final settlement of futures contract.
Consider the situation; if the speculator is purchasing a futures contract which is normally cash-settled one, then he will look for the possible cash adjustment related to his trading account.
The trader will look only for the adjustment whenever the final settlement cost is higher than his initial value. If the trader is finding the final settlement is lower than the initial price, then the amount is debited with the difference value.
Final thoughts
With the help of this article, you will get to know about the advantages and disadvantages of trading cash-settled futures. So make use of this article to clarify your queries regarding the cash-settled futures contracts.
You should also know the possibility of a final settlement price available with higher or lower than the last trading prices of the futures contracts. Even at some times, the cash settlement process exposes the flaws in the practice.
