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 underlying asset’s market value would be at maturity if it were physically settled.

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.

The way in which the cash value of an instrument is calculated varies from contract to contract. In most cases, it is the difference between the market value of the underlying asset on the settlement date and the price agreed under the financial instrument.

For an overview on derivatives and cash settlement, see Practice note, Derivatives: overview (UK).