# 4. Settlement

Settlement is mark-to-market.

Settlement P\&L for any band position is calculated as:

***Net Bands Payout = Intrinsic Value + Residual Value***

* **Intrinsic Value:** payout from the in-the-money portion of the option / vertical spread
* **Extrinsic Value:** value of the out-of-money portion of the option / vertical spread.

For a detailed breakdown of how intrinsic and extrinsic value change across all price zones, see [Annexure A: Band Value Behaviour](/annexure-a-band-value-behaviour.md).

### Liquidation

A trader’s position is subject to liquidation if account leverage reaches 40x *(i.e. margin falls to 2.5% of notional)*. At liquidation, the protocol closes the position and the pool absorbs any remaining equity.

Temporal’s band structure is specifically designed to reduce the probability of reaching this threshold by reshaping the P\&L curve so positions survive more adverse price movement before reaching the liquidation floor.

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