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Offsetting Transaction

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]
… has been placed on extending the number of countries using cap-and-trade systems with offsetting … The CDM has been criticized regarding bottlenecks and transaction costs … disadvantages of some proposals are mentioned (eg that levies on cap-and-trade offset purchases are …

US income taxation of new financial productsUS income taxation of new financial products
www.sciencedirect.com [PDF]
… has been placed on extending the number of countries using cap-and-trade systems with offsetting … The CDM has been criticized regarding bottlenecks and transaction costs … disadvantages of some proposals are mentioned (eg that levies on cap-and-trade offset purchases are …

Organised detachment: Clearinghouse mechanisms in financial marketsOrganised detachment: Clearinghouse mechanisms in financial markets
www.sciencedirect.com [PDF]
… has been placed on extending the number of countries using cap-and-trade systems with offsetting … The CDM has been criticized regarding bottlenecks and transaction costs … disadvantages of some proposals are mentioned (eg that levies on cap-and-trade offset purchases are …

Matching collateral supply and financing demands in dealer banksMatching collateral supply and financing demands in dealer banks
papers.ssrn.com [PDF]
… has been placed on extending the number of countries using cap-and-trade systems with offsetting … The CDM has been criticized regarding bottlenecks and transaction costs … disadvantages of some proposals are mentioned (eg that levies on cap-and-trade offset purchases are …

How do regulated and voluntary carbon-offset schemes compare?How do regulated and voluntary carbon-offset schemes compare?
www.tandfonline.com [PDF]
… has been placed on extending the number of countries using cap-and-trade systems with offsetting … The CDM has been criticized regarding bottlenecks and transaction costs … disadvantages of some proposals are mentioned (eg that levies on cap-and-trade offset purchases are …

What future for the voluntary carbon offset market after Paris? An explorative study based on the Discursive Agency ApproachWhat future for the voluntary carbon offset market after Paris? An explorative study based on the Discursive Agency Approach
www.tandfonline.com [PDF]
… has been placed on extending the number of countries using cap-and-trade systems with offsetting … The CDM has been criticized regarding bottlenecks and transaction costs … disadvantages of some proposals are mentioned (eg that levies on cap-and-trade offset purchases are …

Reduction of financial instrument volatilityReduction of financial instrument volatility
patents.google.com [PDF]
… has been placed on extending the number of countries using cap-and-trade systems with offsetting … The CDM has been criticized regarding bottlenecks and transaction costs … disadvantages of some proposals are mentioned (eg that levies on cap-and-trade offset purchases are …

Technical trading revisited: False discoveries, persistence tests, and transaction costsTechnical trading revisited: False discoveries, persistence tests, and transaction costs
www.sciencedirect.com [PDF]
… has been placed on extending the number of countries using cap-and-trade systems with offsetting … The CDM has been criticized regarding bottlenecks and transaction costs … disadvantages of some proposals are mentioned (eg that levies on cap-and-trade offset purchases are …

Understanding carbon offset technologiesUnderstanding carbon offset technologies
www.tandfonline.com [PDF]
… has been placed on extending the number of countries using cap-and-trade systems with offsetting … The CDM has been criticized regarding bottlenecks and transaction costs … disadvantages of some proposals are mentioned (eg that levies on cap-and-trade offset purchases are …



Q&A About Offsetting Transaction


What is an offsetting transaction?

An offsetting transaction is a trade that exactly cancels the risks and benefits of another instrument in the portfolio.

How can you close a position without having to agree with someone on the other side of your trade?

By entering into an offsetting transaction, you can close out your position without having to agree with someone on the other side of your trade.

Are transactions costs factored in when considering whether or not two trades will completely cancel each other out?

No, transactions costs are not considered when determining if two trades will completely cancel each other out.

What does it mean to "exactly cancel" the risks and benefits of another instrument in the portfolio?

It means that there are no remaining risks or benefits from one side of the trade after entering into an offsetting transaction.

What does it mean to enter into an "offsetting" transaction?

To enter into an offsetting transaction means that you are trading one contract for another contract so as to eliminate any risk or benefit from your original position.