What is an ‘Offsetting Transaction’
In trading, an activity that exactly cancels the risks and benefits of another instrument in the portfolio. An offsetting transaction is used when it is not possible to simply close the original transaction as desired. This frequently occurs with options and other more complex financial instruments.
In this way, a trader does not have to agree to close the option contract with the party on the other side of the options trade, but can simply cancel the net affect by entering into an offsetting transaction.
Explaining ‘Offsetting Transaction’
The most basic example of an offsetting transaction occurs in options trading. Suppose you have sold a call option on 100 shares with a strike price of $35 and an expiration in three months. To close this transaction before three months is over, you can buy a call option with exactly the same features, thus exactly offsetting the exposure to the original call option.
Offsetting transactions typically do not factor in transactions costs.
Further Reading
- Raising climate finance to support developing country action: some economic considerations – www.tandfonline.com [PDF]
- US income taxation of new financial products – www.sciencedirect.com [PDF]
- Organised detachment: Clearinghouse mechanisms in financial markets – www.sciencedirect.com [PDF]
- Matching collateral supply and financing demands in dealer banks – papers.ssrn.com [PDF]
- How do regulated and voluntary carbon-offset schemes compare? – www.tandfonline.com [PDF]
- What future for the voluntary carbon offset market after Paris? An explorative study based on the Discursive Agency Approach – www.tandfonline.com [PDF]
- Reduction of financial instrument volatility – patents.google.com [PDF]
- Technical trading revisited: False discoveries, persistence tests, and transaction costs – www.sciencedirect.com [PDF]
- Understanding carbon offset technologies – www.tandfonline.com [PDF]
