What is Cash Settlement?

Malcolm Tatum
Malcolm Tatum

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.

Cash settlements occur as part of payments relating to futures contracts and also as part of the settlement process in a legal dispute.
Cash settlements occur as part of payments relating to futures contracts and also as part of the settlement process in a legal dispute.

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.

Mediation is often used to arrive at a cash settlement before the case reaches the courtroom.
Mediation is often used to arrive at a cash settlement before the case reaches the courtroom.

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.

Malcolm Tatum
Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including wiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

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