Cash settlement contracts

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Cash settlement contracts

Futures contracts such as stock index futures that settle for cash and do not involve delivery of the underlying.

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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Generally, the VPF may be physically settled (with either the pledged shares or different shares of the subject stock) or, at the taxpayer's option, settled in cash.
FAS 123(R) also provides rules for share-based payments that are issuer liabilities, such as share appreciation rights settled in cash.
However, unlike equity instruments, where fair value is determined only once, the fair value of liability instruments is measured each reporting period until the instruments are settled in cash, and compensation is recognized based on the periodic change in value, through the settlement date.