What Is the Primary Difference between Cash-Settled and Physically-Settled Futures Contracts?

The key difference lies in the settlement process at expiration. A physically-settled contract requires the seller to deliver the actual underlying asset, and the buyer to take delivery.

A cash-settled contract, however, settles by paying the difference between the contract price and the final settlement price in cash. This eliminates the logistical complexities of asset transfer.

Both types are used for price discovery and risk management.