What does the 'isolated method of settlement' involve?

What does the 'isolated method of settlement' involve?

• A. Buying and selling securities with clear economic benefit
• B. Settlement of purchase with sale of the same security without payment
• C. Investing in new securities while maintaining existing positions
• D. Paying off debts with new capital raised

Answer: (B)

The 'isolated method of settlement' refers specifically to the practice of settling a purchase by executing a sale of the same security without the necessity of an actual payment. This means that instead of exchanging cash for the securities being bought, the transaction is effectively canceled out by simultaneously selling an equivalent amount of the same securities. This method can facilitate transactions by simplifying the process and can be useful in situations where an investor's position in a security needs to be adjusted without altering their cash reserves.

Understanding this concept is important for recognizing how securities transactions can be structured to optimize cash flow and manage holdings without triggering additional capital movements. It also highlights the nature of certain trading strategies that focus on maintaining a neutral cash position while actively managing positions within the market.