DEFINITION of 'Bookout'

To close out an open position in an OTC derivative, such as a swap contract, before it matures, either by taking an offsetting position in the contract or by paying the opposite party the market value of the swap agreement. A bookout may also be interpreted as an agreement to cancel an outstanding contract by the parties involved, through cash settlement of the difference between the price specified in the contract and an acceptable reference price.

BREAKING DOWN 'Bookout'

Bookouts are widely used in the electric utility industry for power scheduling convenience. This occurs when two different utilities have offsetting transactions - a purchase and a sale - for the same delivery period and at the same location. The Financial Accounting Standards Board has specific rules that govern such "netting;" the FASB mandates that financial instruments subject to bookout be accounted for using mark-to-market accounting through the income statement.

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