Close out

Schweser says, A futures position may be closed out by: Receiving a cash settlement - the buyer’s margin account would be marked to market on the final day. Now the question: A long position in a deliverable futures contract can be terminated at expiration by all of the following EXCEPT: A) an exchange-for-physicals. B) close-out at expiration. C) an equivalent cash settlement. D) taking delivery. Answer : C A deliverable contract does not permit equivalent cash settlement. Sale of an offsetting contract at the settlement price on the final day of trading (close-out at expiration) will have the same effect, with the cash settlement effectively taking place in the margin account. Whats the difference between: i) Futures position ii) deliverable futures contract Is the key word ’ DELIVERABLE’ that distinguishes whether we can settle it by cash or not?

Yes. This is a trade for deliverables. It would be done by a company that actually needs the physical good at the end of the contract. i.e a chocolate company would enter into a deliverable futures contract to receive cacao 3 months from now locking in the price early if they expect future spot prices will be hire. They need the cacao to produce the chocolate and simply want to lock in resource prices.