It represents the profit or
loss you would've made if you actually delivered the index.
So that means that if the future's price is below the S&P 500 Index
on the day before the final settlement, you can be an arbitrator just the same.
All you have to do is buy a contract, and
that's all you need to do because it'll automatically settle at the end as
the difference between the index and the futures price.
So, it's even easier to arbitrage the financial futures contract.
So it happens quite reliably.
That is, what's quite reliable is, on the last day,
when the delivery day, that corn price future
is going to be exactly the same as the price of, well, a bushel of corn.
And the S&P 500 Index future is going to be,
within a tiny margin of error, the same as the S&P 500 Index.
So it's a clever system.
I hope that I made that clear.
But cash settlement opens up the possibility of doing many more kinds of.
I was mentioning my home price future, that's a cash-settled contract.
We can't deliver homes.
That would be kind of tough.
[LAUGH] How would you deliver a home?
And also, homes are not standardized.
They're all different.
When you have a physical delivery as a settlement procedure,
it has to be possible to define precisely what it is that's delivered.
But homes are so variable, and some of them are beat up and run down.
And some of them are beset by crime, and some of them are wonderful neighborhoods.
It's all so intangible.
So you need cash settled futures.
It's kind of remarkable that cash settled futures didn't
really occur until a few decades ago, because it's a great idea.
It's one of those inventions in finance that I like to talk about.