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What Is the Difference between Physical and Cash Settlement for a Derivative?

Physical settlement delivers the asset; cash settlement only exchanges the net financial difference in currency.
Greeks.Live16.11.25

What Is the Difference between Physical and Cash Settlement for a Derivative?

Physical settlement means that upon expiration, the actual underlying asset is delivered from the seller to the buyer in exchange for the agreed-upon price. For example, a physically-settled Bitcoin futures contract requires the seller to deliver the actual Bitcoin.

Cash settlement means that upon expiration, only the net financial difference between the contract price and the market price is exchanged in cash (or a stablecoin), and no physical asset changes hands. DeFi derivatives are overwhelmingly cash-settled for simplicity and efficiency.

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