In What Scenario Would a Hedger Prefer Physical Settlement over Cash Settlement?
A hedger would prefer physical settlement when they have a genuine commercial need for the underlying asset or when they wish to dispose of the asset at the contract price. For example, a cryptocurrency miner might use physically settled futures to guarantee the sale of their mined coins at a future price, ensuring they are not exposed to basis risk upon liquidation.
Glossar
Physical Settlement Guarantee
Delivery ⎊ Physical Settlement Guarantee, within cryptocurrency derivatives, denotes the obligation to transfer the underlying asset ⎊ the cryptocurrency itself ⎊ upon contract expiration or exercise.
Physical Settlement
Delivery ⎊ The concept of physical settlement, within the context of cryptocurrency derivatives and financial options, signifies the actual transfer of the underlying asset ⎊ be it cryptocurrency, tokens, or fiat currency ⎊ rather than a cash-based settlement.
Genuine Commercial Need
Rationale ⎊ Genuine Commercial Need, within cryptocurrency derivatives, signifies a demonstrable economic justification for engaging in a transaction or establishing a position, exceeding speculative intent.
Hedger
Action ⎊ A hedger, within cryptocurrency derivatives, fundamentally executes strategies designed to mitigate or neutralize price risk exposure.