How is a futures position typically closed?

How is a futures position typically closed?

• A. By initiating a new trade in the opposite direction
• B. By waiting for the contract to reach expiration
• C. By selling the contract on the open market
• D. By buying more of the same contract

Answer: (A)

A futures position is typically closed by initiating a new trade in the opposite direction. This process is often referred to as "offsetting" a position. For instance, if an investor holds a long position in a futures contract (which means they have agreed to buy the underlying asset), they can close that position by selling an equivalent futures contract. This transaction effectively cancels out their initial obligation to buy, securing their profit or loss without having to wait for the contract to reach its expiration date. Closing a position in this manner is a common practice because it allows traders to manage their exposure to market movements actively. It avoids the necessity of holding onto the contract until expiration, which may not align with their trading strategy or risk management approach. Therefore, this method of closing a position is efficient and enables better control over investment timings and results.

A futures position is typically closed by initiating a new trade in the opposite direction. This process is often referred to as "offsetting" a position. For instance, if an investor holds a long position in a futures contract (which means they have agreed to buy the underlying asset), they can close that position by selling an equivalent futures contract. This transaction effectively cancels out their initial obligation to buy, securing their profit or loss without having to wait for the contract to reach its expiration date.

Closing a position in this manner is a common practice because it allows traders to manage their exposure to market movements actively. It avoids the necessity of holding onto the contract until expiration, which may not align with their trading strategy or risk management approach. Therefore, this method of closing a position is efficient and enables better control over investment timings and results.