A takes a long position by buying a December gold futures contract in January, and
B at the same time takes a short position by selling the contract. The orders from
B are matched and the agreed price for December gold is $1000.
Assume that the December gold futures price goes like this:
January = $1000 → ... → November = $800 → December = $700
In November, at the end of the day, the balance in the
A's margin account would be reduced by $200, and the
B's margin account would be increased by $200. (Daily settlement)
In November, if
A decides to close out the position by selling the contract. The futures price on that day is $800, so
A would have a cumulative loss of $200 by closing out.
- Now what happens to
Bholds the contract until December, he would have the right to sell the gold at $1000 while the price in the market is only (or should be very closed to) $700, meaning that
Bshould gain $300. But his margin account has increased by only $200. Where would an extra $100 come from? To whom would
Bsell the gold?
Acan close out if and only if there is a buyer (
Cin your case) who is willing to buy the contract? From the textbook it sounds like closing out can be done just by entering into the opposite side of the original trade.