cash settlement

cash settlement
A financial instrument is cash settled if the underlying asset is not delivered or transferred to the counterparty in exchange for a specified payment when the instrument reaches maturity. Instead, the owner of the financial instrument accepts an amount of money equal to what the financial instrument's market value would be at maturity if it were physically settled (physical settlement). Cash settlement is particularly important in the derivatives market where certain types of derivatives are routinely cash settled because physical delivery would be inconvenient or impossible. For example, an interest rate cap has to be cash settled because the underlying asset is an interest rate, which cannot be delivered. An option on a group of shares will often be cash settled because it is expensive and time consuming to transfer all of the shares into the name of the owner of the option. The way in which the cash value of an instrument is calculated varies from contract to contract. In the case of a futures contract, the cash value equals the notional amount of the underlying asset (for example 100,000 barrels of oil, or 100 shares in a particular company) multiplied by the difference between the market price of the underlying asset at maturity and the future's delivery price. In the case of an option, it is the difference between the market value of the underlying asset and the exercise price of the option.
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USA
A manner of settling a credit derivative transaction such as a credit default swap (CDS) under which the credit protection seller makes cash payments to the credit protection buyer upon the occurrence of a credit event with respect to the reference entity and the fulfilment of any other conditions to settlement. The cash payments from the credit protection seller to the credit protection buyer are generally structured to equal the par value of the reference obligation less its market value. (Cash settlement, therefore, requires market valuation of the reference obligation, which can present timing and valuation issues.) The election of whether a transaction will be subject to cash settlement or physical settlement is typically made in the transaction confirmation at the transaction's outset. There is no deliverable obligation in a cash settled transaction, which makes it an appealing alternative to physical settlement in instances where the notional amount of CDS written on a particular reference entity exceeds the amount of the debt obligations of that reference entity available for purchase in the market.
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Practical Law Dictionary. Glossary of UK, US and international legal terms. . 2010.

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  • cash settlement — Instead of having the actuals delivered, cash is transferred upon settlement. The CENTER ONLINE Futures Glossary The agreement of a buyer and seller to exchange the security and the payment on the same day as the trade. For money market… …   Financial and business terms

  • Cash Settlement — A settlement method used in certain future and option contracts whereby, upon expiry or exercise, the seller of the financial instrument does not deliver the actual but transfers the associated cash position. For sellers not wishing to take… …   Investment dictionary

  • cash-settlement — The investor receives cash if the covered warrant can be exercised profitably at expiry. The gain achieved on the warrant is transferred to the holder without the holder having to enact a buy or sell trade. London Stock Exchange Glossary …   Financial and business terms

  • Cash settlement contracts — Futures contracts, such as stock index futures, that settle for cash, not involving the delivery of the underlying. The New York Times Financial Glossary …   Financial and business terms

  • cash settlement contracts — futures contracts such as stock index futures that settle for cash and do not involve delivery of the underlying. Bloomberg Financial Dictionary …   Financial and business terms

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  • Settlement — steht für Settlement (Finanzwesen) Cash settlement Finanzbegriff Permanent Settlement, Steuerbegriff Siehe auch Act of Settlement Latin Settlement The Settlement Selkirk Settlement Settlement Indians …   Deutsch Wikipedia

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  • Settlement — When payment is made for a trade. The New York Times Financial Glossary * * * settlement set‧tle‧ment [ˈsetlmənt] noun 1. [countable, uncountable] an official agreement or decision that ends an argument between two people or organizations: •… …   Financial and business terms

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