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Cash settlements occur as part of payments relating to futures contracts and also as part of the settlement process in a legal dispute. In general, a cash settlement is simply the process of using cash to settle some sort of outstanding obligation, thus fulfilling the terms of the transaction and allowing the matter to be considered resolved or completed. Upon the cash delivery, both the originator and the receiver involved in the transaction are free to focus on other matters.
When it comes to futures trading, the process of using a cash settlement as the mode of payment is common. Essentially, a cash settlement will be extended on the trade date for the security, rather than on the settlement date. This allows the underlier of the security involved with the transaction to retain the underlying asset that formed the basis for the futures or options in the first place.
In the matter of legal situations, a cash settlement is often ordered as a means of restitution in the event of a lawsuit. Generally speaking, the court will order that a fixed amount of cash or cash assets be delivered to the entity that wins the suit within a specified period of time. In the event that the terms of the cash settlement are not honored, then additional restitution may be ordered, assets may be seized to settle the debt, or one of the parties may spend time behind bars.
Some vendors will also offer a client a cash settlement in order to discharge an outstanding debt. This is often the case when the customer is facing severe financial problems and may be considering bankruptcy. In order to avoid being included as a listed creditor in the bankruptcy, the vendor may offer a cash settlement offer to the client that may be up to half the actual amount owed. Often, this is sufficient to at least cover the actual expenses of the vendor, although it eliminates any profit on the invoiced transactions.
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