There are two settlement process in Commodity Market, and these are Physical Delivery and

Cash Settlement.

Physical Delivery – It involves in the physical delivery of the underlying asset(s) on the contract's
settlement date. A clearing broker or clearing agent coordinates and settles the physical delivery
settlement process. The contract holder is accountable for the physical delivery of the
commodity if they choose to take a short position. If the holder chooses to take a long position,
he or she will be taking i.e., receiving physical delivery of the commodity.

Cash Settlement – It does not involve the physical delivery of the asset(s) under consideration.
Instead, it involves the settlement of net cash on the settlement date. The purchaser or contract
holder must pay the net cash amount on the settlement date and execute the commodity
settlement. The difference between the underlying's spot (SP) and futures (FP) prices is the net
cash amount.

Because of the convenience and instantaneity that it provides, cash settlement is the
most popular method for commodity settlement. Cash settlement is also the more favored
mode of settlement because it provides more liquidity to the market. Furthermore, most
financial derivatives, particularly options and futures contracts, are cash-settled. Cash
settlement is the simplest and most convenient way of settlement because the total cost is
merely the upfront net cash amount. There are no additional costs or fees associated with
settlement transactions.

Unlike most options and futures contracts, which, as previously stated, physical delivery
is the more popular mode of settlement for equity options contracts. Additional cost including
Delivery expenses, transportation costs, brokerage fees, and other fees are all part of the
physical delivery process.

There are two types of settlement, and these are Daily Settlement and Final Settlement

Daily Settlement is done at the end of each trading day. It is also based on the daily settlement
prices. Takes into account all trades, all open positions are mark to market.

Final Settlement is done on the day of contract expiry. It is based on the final settlement price,
or the due date rate. Takes into account only trades not closed till contract expiry.