The 26-year-old has joined the Cottagers permanently in what is a record sale for Wolves after spending the first half of the season on loan with them.
The Championship side had the option to buy the Portuguese, and they have exercised it after his five goals in 23 games under Scott Parker.
Wolves are understood to have doubled their money with Cavaleiro, having signed him for around £7million from Monaco in 2016.
He has joined Fulham until the summer of 2024, and their vice-chairman Tony Khan said: "Since joining us in the summer, Ivan has shown real quality and I know there’s much more to come.
"He is an extremely gifted player, already registering five goals and six assists, he’s been outstanding for us so far.
"He has the ability to make a difference in a game, so I am excited that he’s a Fulham player until at least 2024.
"I worked hard to get him here and I know Ivan has a big part to play in the journey ahead to get us back to where we want to be, in the Premier League."
Cavaleiro helped Wolves clinch the Championship crown in Nuno Espirito Santo's first season at the helm and went on to play 23 times in the Premier League.
He made a total of 106 appearances in gold and black, scoring 19 goals.
Wolves added in a club statement: "Fulham have signed Ivan Cavaleiro permanently for an undisclosed fee.
"The Portuguese international has spent the first half of the campaign on loan with the Cottagers, who have now triggered their option in the deal.
"Everyone at Wolves would like to wish Ivan the best of luck for the future."