A trader who buys a futures contract and has no other
position on the exchange is long. If
this purchase is not eventually offset by an equivalent sale of futures then the
buyer will have to take delivery of the actual commodity.Alternatively, a trader
who sells a futures contract without
an offsetting purchase of futures is said to be short.
Traders who have taken either position in the market
have two ways of liquidating it. The first involves the actual delivery or
receipt of goods. Most traders choose the second option, which is to cancel an
obligation to buy or sell by carrying out a reverse operation, called an offsetting transaction. By buying a matching
contract a futures trader in a short position will be released from the
obligation to deliver. Similarly, a trader who is long can offset outstanding
purchases by selling.
(AA). It is possible to liquidate futures positions in the spot market
privately under a pre-arranged trade. This type of transaction, called an
against actuals trade, avoids the complexities of making a physical delivery
under a futures contract. However, such AA transactions must take place under
the rules of the exchange that supervises the futures contract.
interest. The total of the clearing house's long or short positions
(which are always equal) outstanding at a given moment is called the open
interest. At the end of each trading day, the clearing house assumes one side of
all open contracts: if a trader has taken a long position, the clearing house
takes the short position, and vice versa.
The clearing house guarantees the performance of
both sides of all open contracts to its members and each trader deals only with
the clearing house after initiating a position. In effect, therefore, all
obligations to receive or deliver commodities are undertaken with the clearing
house and not with other traders.