DEFINITION of 'Switch'

A futures-trading strategy involving the offset of one contract with entry into another position that has nearly identical details but a longer expiration. Commonly referred to as a "roll forward".

BREAKING DOWN 'Switch'

A switch is used by investors wishing to maintain their current positions in contracts that are nearing expiry.

For example, let's say that it is currently Jan 2004, and an energy company that will have 100,000 barrels of oil to sell in Jun 2006 wants to hedge its position. However, the company does not simply buy the Jul 2006 oil futures contract because the company deems this contract too illiquid. It requires a contract to have a delivery period of no more than 13 months in advance. A possible hedging strategy for the company is to short the appropriate number of Jul 2005 contracts, in Jun 2005, close out the Jul 2005 position, and then switch to the Jul 2006 contract.

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RELATED FAQS
  1. What does it mean to roll a derivative contract?

    Find out more about derivative securities, how to roll forward a derivative contract and what it means when a derivative ... Read Answer >>
  2. What is the difference between forward and futures contracts?

    Fundamentally, forward and futures contracts have the same function: both types of contracts allow people to buy or sell ... Read Answer >>
  3. How do futures contracts roll over?

    Learn about why futures contracts are often rolled over into forward month contracts prior to expiration, and understand ... Read Answer >>
  4. Why do companies enter into futures contracts?

    Learn how companies use futures contracts for the purposes of hedging their exposure to price fluctuations as well as for ... Read Answer >>
  5. How can a futures trader exit a position prior to expiration?

    A futures contract is an agreement to buy or sell a commodity at a pre-determined price and quantity at a future date in ... Read Answer >>
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