Cash Settlement

Cash Settlement

The process by which the terms of an option contract are fulfilled through the payment or receipt in dollars of the amount by which the option is in-the-money as opposed to delivering or receiving the underlying stock.

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Cash Settlement Contracts

Futures or option contracts in which the counterparties agree that instead of delivering the underlying assets at the execution of the contract, one delivers their cash equivalent. For example, suppose someone bought a call contract taking on the obligation to buy a certain number of barrels of oil, should the option be exercised. If/when the option is exercised, the call holder pays the strike price. In exchange, the counterparty delivers the cash value of the agreed upon number of barrels of oil. Such a transaction is usually netted between the parties so that cash only changes hands once.

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cash settlement

Settlement of a futures contract in cash rather than in the asset underlying the contract. For example, stock index futures call for cash settlement because it is not feasible actually to deliver an index or the securities constituting an index.

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Cash settlement. To settle a futures contract where the underlying asset is a financial instrument, such as a stock index or interest rate rather than a physical commodity, you deliver cash.

In contrast, when you settle a futures contract on other commodities, you deliver the physical product. But because index values or interest rates are intangible, physical delivery is not possible.

The way you calculate the amount due is defined in the contract. When the underlying instrument is an index, this usually involves multiplying the value of the index times a fixed amount. For example, the cash settlement of a contract on the Standard & Poor's MidCap 400 Index is determined by multiplying the value of the index times $500.

However, in the vast majority of cases, futures contracts are offset before the settlement date, and no delivery is required.