An option that is embedded in a derivative financial instrument whereby one party has a choice over settlement. In other words, this option gives an issuer or a holder the right to choose the mode of settlement/ settlement alternatives: settlement in cash (net cash settlement) or exchange of shares for cash. Unless it ends up as an equity instrument, a settlement option may either be a financial asset or a financial liability. An example of a settlement option that is not an equity instrument, but rather a financial asset/ liability is a contract that entails the purchase or sale of a non-financial item where delivery can be in cash (net cash settlement) or a financial instrument. This contract doesn’t entail exercise into an equity instrument.

Another example is a share option that is settled net in cash or in case of an exercise, the underlying shares would be exchanged for cash.