DEFINITION of 'Cylinder'

A cylinder is a term used to describe a transaction involving derivatives. As a part of the transaction, the investor does not incur an initial cost; this can be demonstrated through the sale of one derivative and using the proceeds to buy a different derivative. As the transaction does not require any additional investment to complete, the transaction is defined as a cylinder.


Financial derivatives are a mechanism by which two or more parties can trade certain financial risks without necessarily trading the asset upon which the risk is based. Such risks may include currency risks, credit risks or commodity price risk. While some financial derivative trading utilizes offsetting contracts, it is not specifically inherent to a cylinder trade. A cylinder is similar to a positive carry but does not inherently involve an offsetting position.

Example of a Cylinder

A cylinder transaction does not require the addition of a new financial investment for completion. Instead, it can be completed through the use of a multi-stage transaction. The simplest of cylinder transactions can be completed in two stages. The first stage involves the sale of a currently held investment, such as a derivative. This sale releases the monetary investment, allowing the funds to be reinvested. If these funds are reinvested during the second stage, such as through the purchase of a different derivative, the transaction is completed without the need for the investor to contribute any additional funds. Therefore, no initial cost is experienced by the investor for the transaction to be completed. This process could be repeated as necessary to proceed with new transactions in the future.

Offsetting Transaction

An offsetting contract involves entering into a contract that yields opposite results when compared to the initial contract. Such transactions minimize risk when the original investment cannot be canceled. For example, if Company X purchases 100 shares at a price of $5 per share, an offsetting transaction involves the ability to sell the same 100 shares at a price of $5 per share. These two positions inherently negate each other and eliminate the risk involved in the first transaction.

Positive and Negative Carries

If an offsetting position is in place, these carries can be either positive or negative in nature. A positive offset exists when the gain being produced by one position exceeds the losses of the other. A negative carry results when the gains on one position are not enough to offset the losses of the other.

  1. Offsetting Transaction

    In trading, an activity that exactly cancels the risks and benefits ...
  2. Opening Transaction

    The act of initiating a trade. An opening transaction is the ...
  3. Derivative Product Company - DPC

    A special-purpose entity created to be a counter-party to financial ...
  4. Inverse Transaction

    A transaction that can cancel out a forward contract that has ...
  5. Cash and Carry Transaction

    A type of transaction in the futures market in which the cash ...
  6. Offset

    1. To liquidate a futures position by entering an equivalent, ...
Related Articles
  1. Trading

    Trading Options With The Zero-Cost Cylinder

    The zero-cost cylinder allows traders to effectively trade the market while protecting their downside.
  2. Investing

    What Are Transaction Costs?

    Transaction costs are expenses incurred from buying or selling securities.
  3. Trading

    Derivatives 101

    Learn how to use this type of investment as an alternative way to participate in the market.
  4. Trading

    Derivatives 101

    A derivative investment is one in which the investor does not own the underlying asset, but instead bets on the asset’s price movement with another party.
  5. Trading

    Are Derivatives Safe For Retail Investors?

    These vehicles have gotten a bad rap in the press. Find out whether they deserve it.
  6. Trading

    Futures, Derivatives and Liquidity: More or Less Risky?

    Futures and derivatives get a bad rap after the 2008 financial crisis, but these instruments are meant to mitigate market risk.
  7. Financial Advisor

    SEC Derivatives Rule May Limit Diversification

    The SEC has proposed rules that will limit the use of derivatives by fund managers. Critics believe the rules will impede funds' ability to diversify.
  8. Managing Wealth

    Offset Risk With Options, Futures And Hedge Funds

    Though all portfolios contain some risk, there are ways to lower it. Find out how.
  9. Trading

    Are Derivatives A Disaster Waiting To Happen?

    They've contributed to some major market scandals, but these instruments aren't all bad.
  10. Trading

    Careers In The Derivatives Market

    The growing interest in and complexity of these securities means opportunities for job seekers.
  1. How are arm's-length transactions determined by law?

    Determine if transactions are conducted at arm's length by checking if the parties to a contract are independent and transact ... Read Answer >>
  2. What are the main risks associated with trading derivatives?

    Understand derivatives trading and learn about the primary risks usually associated with trading in the derivatives market, ... Read Answer >>
  3. What expiry months are typically available for derivatives?

    Discover more about the derivatives market and learn about the varying expiration months for derivatives in different financial ... Read Answer >>
  4. Can mutual funds invest in derivatives?

    Find out about mutual fund investment options, and understand whether mutual funds are permitted to include investments in ... Read Answer >>
  5. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Answer >>
  6. Are arm's length transactions always better than transactions not at arm's length?

    Transactions not at arm's length have real tax and other consequences for individuals and businesses, but they are not necessarily ... Read Answer >>
Hot Definitions
  1. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  2. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  3. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  4. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  5. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
  6. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
Trading Center