Where does it say it settled the contract?

Options & Futures
1

Course Name: Futures Trading: Concepts & Strategies, Section No: 7, Unit No: 5, Unit type: Quiz

where does it say it settled the contract?

it only changed ownership, what am I missing here?

2

Hi Sebastian,



So, if you check the previous question and this question, 4 transactions are happening. 

  • Transaction 1: The open interest increases because a new contract is created. Alex buys a contract from Bob. Alex is long, and Bob is short.
  • Transaction 2: When Alex sells the contract to Charlie, Alex’s long position is transferred to Charlie. The overall open interest does not change because the contract is still active but has merely changed hands.
  • Transaction 3: Bob creates another new contract by selling to David. The open interest increases again as a new contract is written. Now, Bob is short two contracts while David is long one new contract.
  • Transaction 4: Charlie, who held a long position, sells to Bob. Bob already has a short position, so buying the contract from Charlie means that Bob’s previous short position is offset. This action decreases the open interest by one because one contract has effectively been cancelled out. The position is settled as the long and short positions neutralize each other.
Hope this helps!