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What is a Settlement Option?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 11 April 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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"Settlement option" is a term that may relate to several different types of financial transactions. One example has to do with identifying different selections or options for receiving proceeds from some type of life insurance policy. The term is also used in investment circles to describe the time frame in which a seller may deliver securities recently purchased by a buyer. When it comes to foreign exchange deals, a settlement option has to do with the period of time that the seller has to settle the forward contract and complete the transaction by delivering the futures to the buyer.

As the term relates to a life insurance policy, a settlement option is one of the selections that the beneficiary may choose when receiving disbursements from the policy. For example, the life insurance settlement option may allow the beneficiary to receive a lump sum payment. In other situations, the beneficiary may have the option of receiving the funds in a series of payments over a period of time. All possible options are identified in the terms and conditions of the policy itself. Typically, an agent will go over each option with the beneficiary, explaining any tax liability or other relevant factors associated with each option.

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With investments like stocks or bonds, the settlement option has to do with the time frame that the seller has to deliver the securities to the new owner. The period set for the delivery may range anywhere from five days after payment is tendered, or as many as 60 days, depending on the terms and conditions related to the sale. The range of the period is normally based on the transaction or trading date associated with the sale, and the duration of the settlement period must be structured in compliance with local laws and regulations regarding the purchase and sale of securities.

When it comes to investment deals that involve foreign exchange securities structured with a forward contract, the settlement option focuses on the time frame that the seller has to settle that contract before the deal is considered to be null and void. The time frame for the settlement is normally defined in the provisions of that contract, and will often specify specific steps or processes that must be followed as part of the settlement. As with the sale of any type of securities, the provisions of the contract must comply with trade regulations that apply in the nation in which the deal is made.

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