Practical Law Glossary Item 6-386-8226 (Approx. 4 pages)
A manner of settling a derivatives transaction under which the parties exchange the difference between an agreed price and the market price, or spot price, of the underlying referenced asset on an agreed future date multiplied by the number of shares, units or contracts specified in the transaction confirmation.
Under certain contracts, such as interest rate swap agreements (which are always cash settled), the cash-settlement payment is equal to the difference between the product of a specified fixed rate and the contract's notional amount (as specified in the transaction confirmation), and the product of a specified floating rate and the contract's notional amount.
Many commodity derivatives and equity derivatives are also cash settled. The election of whether a transaction will be subject to cash settlement or physical settlement is typically made in the transaction confirmation at the transaction's outset.