Future vs Forward Contract Markets
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What is the "closing out" of a position in the futures markets?
Why is closing out of a contracts permitted in the futures markets?
Why is unilateral transfer or sale of the contract typically not allowed in forward markets?
Please incorporate two high quality references and discuss answers in detail.
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Solution Summary
Future contracts are compared and contrasted with forward contracts. The concept of closing out a position is illustrated in detail, as well as the liquidity of each type of contract. APA format with references.
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See attached file for reference.
Closing a futures position refers to the (very common) practice of taking an equal and opposite position in order to avoid having to take or make delivery of the commodity in question.
"For example, speculators who purchased Treasury Bond futures contracts could sell similar futures contracts by the settlement date. Because they now own a contract to receive [long position] and a contract to deliver [short position], the obligations net out," (Madura, 2009. Pg 332.)
Closing out of futures contracts is permitted for two primary reasons. First, a futures contract is highly liquid owing to the fact it is exchange traded-and is therefore a ...
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