What Is the Settlement Process for a Cash-Settled Forward Contract?

In a cash-settled forward contract, there is no physical delivery of the underlying asset at expiration. Instead, on the settlement date, the two counterparties simply exchange the difference between the agreed-upon forward price and the current market price (spot price) of the underlying asset.

If the market price is higher than the forward price, the seller pays the buyer the difference, and vice versa. This is a common settlement method for financial derivatives like stock index forwards.