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Finance Glossary

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Cash Settlement

Definition:

Let’s say you buy a lemonade from the kid down the street. You trade your two bucks for a lukewarm glass of what tastes like battery acid. Pretty simple trade, right? Not so if you want to trade futures or options. In that case, there’s lots of paperwork to be signed and papers to file. Information about risks and commissions must be shared. This is called “settling” a trade. When you settle a trade, it clears.

And there are two ways for trades to clear: the regular way and cash settlement. The regular way, not surprisingly, is the most common way. With a cash settlement, what happens is that, at the end of the contract, you will just be debited the difference between the final settlement and entry price.