Define “Price Slippage” in the Context of Derivatives Settlement

Price slippage is the difference between the expected price of a trade and the price at which the trade is actually executed. In the context of physical settlement, slippage occurs if the forced buying or selling of the underlying asset to meet the delivery obligation pushes the market price unfavorably, especially for large positions or illiquid assets.

Cash settlement typically calculates based on a reference price, mitigating this direct market impact.