What Is Cash Delivery?

Cash delivery is a settlement method that occurs in the investment world when a futures contract expires or an options contract is exercised. Also known as 澳洲幸运5官方开奖结果体彩网:cash settlement, it requires the party in a loss position to remit payment to the party in a gain position, rather than exchanging the underlying asset. Alternatively, in the foreign exchange (forex) market, cash delivery means the settlement of 🔥a contract.

Understanding Cash Delivery

Futures and options contracts are agreements that give investors the obligation or right to buy or sell a particular asset at a later date for an agreed price. When these 澳洲幸运5官方开奖结果体彩网:derivative instruments expire or are exercised, the contract holder should,෴ in theory, deliver the physical commodity or transfer the shares of stock.

In reality, the vast majority of futures and options contracts are delivered with cash instead. That's because these contracts do not require the transfer of ownership or delivery of the 澳洲幸运5官方开奖结果体彩网:underlying asset. So w📖hy would parties trade these iꦐnvestments? It's simple.

Investors who use these investments are known as 澳洲幸运5官方开奖结果体彩网:speculators. They are not interested in possessing the underlying physical asset and simply want to hedge against its price changes. Those who opt for a cash delivery will either be credited or debited the difference between the initial price and the final settlement once the futures or options contract expires or is 澳洲幸运5官方开奖结果体彩网:exercised.

Advantages and Disadvantages of Cash Delivery

Lඣike any financial strategy, cash delivery has its benefits and drawbacks.

Advantages

Cash delivery offers many advantages over physical delivery. First and foremost, it is less expensive and much simpler to exchange the contract's cash position—the net cash value of the assets—once a contract has expired.

Cash delivery also allows for the trading of assets that cannot be delivered physically, namely indexes, such as the 澳洲幸运5官方开奖结果体彩网:S&P 500 or the 澳洲幸运5官方开奖结果体彩网:Nikkei 225. Cash delivery has been credited for making futures and options trading easier, helping to boost market 澳洲幸运5官方开奖结果体彩网:liquidity and pavꦏe the way for a broader💎 choice of financial products to become available.

Disadvantages

One potential drawback of cash delivery is the risk that this option could leave investors unhedged when the contract expires. Without the delivery of the actual underlying assets, any hedges in place before expiration wiꦰll not be offset. As a 🤡result, traders who opt for a cash delivery must close their hedges or roll over expiring derivatives positions to replicate the expiring positions.

Arranging the delivery of physical assets, such as gold or livestock, is time-consuming and comes at a considerable expense. Many traders are not interested in stockpiling gold in warehouses or buying live animals to start a farm, anyway. All they want to do is make money from betting on the 澳洲幸运5官方开奖结果体彩网:market value of these things.

Other Types of Cash Delivery

The term cash delivery is also used in the forex market. In this case, it refers more generally to the settlement of a contract, which is always in cash (obviously, since 澳洲幸运5官方开奖结果体彩网:currencies are what's being traded).

The forex market is open 24 hours a day, five days a week, except for holidays, and operates worldwide. To participate in forex trading, the investor must first establish and fund an 澳洲幸运5官方开奖🦋结果体彩网:International Monetary Market (IMM) delivery account. At a contract's end, fun💃ds are withdrawn or deposited into the delivery account in the domestic currency.

A spot forex deal is for immediate delivery, which is T+2 or two 澳洲幸运5官方开奖结果体彩网:business days for most 澳洲幸运5官方开奖结果体彩网:currency pairs. The major exception is the purchase or sale of USD/CAD, which settles in one business day. Weekends and holidays can cause the time between 澳洲幸运5官方开奖结果体彩网:transaction and settleme൲nt dates to increase substantially, especially during holiday seasons like Christmas and Easter. The forex market practice also requꦓires that the settlement date be a valid business day in both countries.

澳洲幸运5官方开奖结果体彩网:Forex forward contracts are a special type of foreign currency transaction. These contr𝓰acts always take place after the date that the spot contract settles and are used to protect the buyer from fluctuations in currency prices.

Example of Cash Delivery

Here's a hypothetical example to show how transactions work with cash delivery. Let's say that Adam buys a cash-delivered futures contract, allowing him to purchase 100 head of cattle two months from now for $300 per head for a total of $30,000. The current price for a head of cattle is also $300. Adam has bought this contract to hedge against the potential of rising livestock prices.

If cattle trade for $350 per head by the contract’s expiration, Adam's cash-delivered futures contract profits by $5,000. He can use this to offset the $35,000 he will have to spend if he buys 100 head of cattle. However, if the price falls to $250, his cash-delivered futures contract loses $5,000. In this case, if he wants to purchase the 100 head of cattle, he can do so at the market price of $25,000, but he must pay out a total of $30,000, counting the $5,000 cash-delivered futures loss.

The Bottom Line

Futures contracts are financial contracts that obligate one party to buy or sell the underlying asset at a certain price by an agreed-upon date. In many cases, investors don't actually take physical possession of the asset. Rather, they require cash delivery. Cash delivery tends to be the favored outcome of this type of investment mainly because most investors don't actually want the asset. Rather, they speculate and make bets on the movement of the price of the asset. Taking delivery of the asset is also time-consuming and expensive, which is why most investors prefer settling with cash when the contract expires.