Investments, tenth edition

  Cash versus Actual Delivery 

 Most futures contracts call for delivery of an actual commodity such as a particular grade 

of wheat or a specified amount of foreign currency if the contract is not reversed before 

maturity. For agricultural commodities, where quality of the delivered good may vary, the 

exchange sets quality standards as part of the futures contract. In some cases, contracts 

may be settled with higher- or lower-grade commodities. In these cases, a premium or dis-

count is applied to the delivered commodity to adjust for the quality difference. 

 Some futures contracts call for  cash settlement.  An example is a stock index futures 

contract where the underlying asset is an index such as the Standard & Poor’s 500 or the 

New York Stock Exchange Index. Delivery of every stock in the index clearly would be 

impractical. Hence the contract calls for “delivery” of a cash amount equal to the value 

that the index attains on the maturity date of the contract. The sum of all the daily settle-

ments from marking to market results in the long position realizing total profits or losses of 

 S  

 T 

   2   F  

0

 , where  S  

 T 

  is the value of the stock index on the maturity date  T  and  F  

0

  is the origi-

nal futures price. Cash settlement closely mimics actual delivery, except the cash value of 

the asset rather than the asset itself is delivered. 

 More concretely, the S&P 500 index contract calls for delivery of $250 times the value 

of the index. At maturity, the index might list at 1,200, the market-value-weighted index 

of the prices of all 500 stocks in the index. The cash settlement contract calls for delivery 

of $250  3  1,200, or $300,000 cash in return for $250 times the futures price. This yields 

exactly the same profit as would result from directly purchasing 250 units of the index for 

$300,000 and then delivering it for $250 times the original futures price.  

  Regulations 

 Futures markets are regulated by the federal Commodities Futures Trading Commission. 

The CFTC sets capital requirements for member firms of the futures exchanges, authorizes 

trading in new contracts, and oversees maintenance of daily trading records. 

 The daily mark-to-market settlements for each contract held by the long position will 

be as follows:   

 The profit on Day 1 is the increase in the futures price from the previous day, or 

($30.20  2  $30.10) per ounce. Because each silver contract on the Commodity Exchange 

(CMX) calls for purchase and delivery of 5,000 ounces, the total profit per contract is 

5,000 times $.10, or $500. On Day 3, when the futures price falls, the long position’s 

margin account will be debited by $350. By Day 5, the sum of all daily proceeds is $550. 

This is exactly equal to 5,000 times the difference between the final futures price of 

$30.21 and original futures price of $30.10. Because the final futures price equals the 

spot price on that date, the sum of all the daily proceeds (per ounce of silver held long) 

also equals  P  

 T 

   2   F  

0

 .