Settlement in a derivatives contract is a reference to the:

Settlement in a derivatives contract refers to the manner in which the contract is satisfied at expiration. This can involve the delivery of the underlying asset or a cash payment, depending on the specific terms of the derivative. For example, in a futures contract, settlement can occur through actual delivery of the commodity or by making a cash payment based on the difference between the contract price and the current market price. In options contracts, settlement is often cash-based unless the option is exercised, leading to the actual transfer of the underlying asset.

Understanding settlement is crucial because it determines the final outcome of the derivative transaction and how stakeholders fulfill their obligations. The exact method of settlement will be clearly defined in the contract specifications, influencing the risk and return profiles of the parties involved.