Delivery & Settlement Procedures – Cash vs Physical Delivery

1. Introduction

Settlement refers to the final obligations of the Buyer and Seller. When the contract expires, how do they settle the deal? DO they exchange goods (Delivery) or just money (Cash)?

2. Methods of Settlement

A. Cash Settlement

• Concept: The contract is settled by paying the difference between the Contract Price and the Settlement Price. No asset changes hands.
• Where Used:
  1. Index Futures (Nifty, Sensex): You cannot physically deliver an "Index".
  2. Interest Rate Futures.
• Example: You bought Nifty Fut at 20,000. On expiry, Nifty is 20,100.
  • You receive ₹100 x Lot Size in Cash.
  • The Seller pays ₹100 x Lot Size.
  • Deal Closed.

B. Physical Settlement (Delivery)

• Concept: The Seller must deliver the actual shares/commodities to the Buyer, and Buyer must pay the full contract value.
• Where Used:
  1. Commodity Futures: Gold, Silver, Agri products (though many are cash settled too).
  2. Stock Futures: In India, SEBI has mandated physical delivery for stock derivatives since 2019 upon expiry.
• Example: You bought Reliance Fut (250 shares) at ₹2000. You hold it till expiry.
  • You must pay ₹2000 x 250 = ₹5 Lakhs.
  • You will receive 250 Reliance shares in your Demat account.

3. Comparison Table

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4. Exam Notes: Writing the Answer

Question: "Distinguish between Cash Settlement and Physical Settlement." (5 Marks)

Answering Structure:

1. Introduction: "Settlement is the process of closing a derivative contract...".
2. Cash Settlement: Explain "Difference payment". Mention it's used for Indices.
3. Physical Settlement: Explain "Asset exchange". Mention it requires full funds.
4. Trend: Mention that India has moved towards Physical Settlement for stocks to curb excessive speculation.

5. Quiz Time! 🎯

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