What Is an Inverse Transaction?

Inverse transaction occurs when somebody makes a tra💟de to close with a counterparty, who has the opposite position and so closes their position as well with the same trade.

The term inverse transaction is most often used in the context of closing a forward or options contract with the same 澳洲幸运5官方开奖结果体彩网:value date. This allows the investor to 𒈔quantify the profit or loss of the entir🌠e transaction.

Understanding Inverse Transactions

An inverse transaction is one that is used to undo or offset another transaction made previously by an investor with the same transaction details. Inverse transactions are commonly used with options and forwards. This leaves the investor with a fixed gain or loss when the transaction is closed.

Investors who purchase forwards can choose to take possession of the 澳洲幸运5官方开奖结果体彩网:underlying asset, such as a currency, at the time of expiration or they can close the contract before the 澳洲幸运5官方开奖结果体彩网:expiration date is reached. To close the position, the investor must buy or sell an 澳洲幸运5官方开奖结果体彩网:offsetting transaction.

If the inverse transaction is completed with a different party other than the investor purchased the original forward contract through, then this results in a separate trade that fully covers or locks in the profit or loss on the first transaction. The first transaction won't be closed out, even though the net result of these two transactions offsets since they were done through two different parties.

An inverse transaction can result in either a profit or loss to the investor. If the trades use leverage (where the investor borrows funds to initiate the transactions), then the losses could trigger 澳洲幸运5官方开奖结果体彩网:margin calls.

Example of an Inverse Transaction

Here's a hypothetical example of how inverse transactions work. Assume an American company purchases a €150,000 forward contract at the specified price of $1.20 per one euro in April to be transacted in June. It can do an inverse transaction by selling €150,000 with𒀰 the same expiration date as the fo🎶rward it purchased in April.

By doing this, the company has 澳洲幸运5官方开奖结果体彩网:locked in a profit or loss. This will be the amount of money received for selling the euro less the amount paid for the pur𒐪chase of the euros with the forward contract. If the euro rises in value since the purchase, then the buyer comes out ahead.

Let's say the two parties agree to an exchange rate of $1.20 EUR/USD, so if the price rises to $1.25, they were better off buying at $1.20. On the other hand, if the euro 🎐falls to $1.15, they aꦗre worse off since they are contractually obligated to transact at $1.20.

Companies use forwards to lock in rates on funds they will need in the future and are more concerned with knowing what their future cash inflows and outflows will be, rather than the potential price 澳洲幸运5官方开奖结果体彩网:volatility.