• Offsetting transactions


    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.

    Against actuals (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.

    Open 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.

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