What Is an Against Actual Transaction?
The term “against actual” refers to a type of transaction regularly carried out in the commodities futures markets. In an against actual transaction, holders of opposing futures contracts for the same commodity agree to settle their respective contracts by exchanging them with one-another along with a payment based on the excess value of one contract over the other. This transaction allows both parties to close out their positions without needing to either make or receive physical delivery of the underlying commodity.
Against actual transactions are important for futures market participants who aim to speculate on the future price of commodities or to accomplish financial objectives such as hedging risk. By contrast, industrial buyers who rely on physical commodities for their production processes are more likely to require physical delivery of their commodities.
- An against actual transaction is a type of transaction allowing commodity futures traders to settle their trades without making or taking physical delivery.
- It is commonly used among commodity futures speculators and risk hedgers.
- The two parties to an against actual transaction will agree to settle their respective contracts in cash, based on a price differential calculated from the current market value of the two futures contracts.
How Against Actual Transactions Work
Futures markets have existed for centuries for a very practical purpose: to allow producers and buyers of essential goods to set reasonable prices for commodities in advance of their actual production. A farmer who grows corn, for example, has an agreement with a wholesale buyer to supply a certain amount of corn at a set price on a particular date.
Today, however, a large percentage of the participants in the futures markets do not actually intend to obtain physical delivery of the commodities underlying their contracts. Instead, they are financial buyers whose goal is to speculate on the future direction of commodity prices. These buyers help support the commodities futures market by contributing liquidity, making it easier for other market participants to obtain efficient prices and fill large orders.
Since these buyers do not intend to take physical delivery of the commodities they buy, they need a way to close out their positions for cash. In an against actual transaction, the holder of a commodities futures contract that is coming close to its delivery date will exchange that contract with another market participant who had previously sold a futures contract for that same commodity. The two parties will then exchange cash based upon the price differential between the two futures contracts at the time of the sale.
Real World Example of an Against Actual Transaction
Let us examine this scenario in more detail. Suppose we have two investors: Speculator A and Speculator B. Both parties entered the commodity futures market with the intention of speculating on the price of oil, but they made opposite speculative bets. Speculator A bought oil futures because she believed oil prices would rise, whereas Speculator B sold oil futures because he believed prices would fall.
Let us imagine that oil prices fell after both speculators made their trades, and that both parties are now close to their delivery dates. This means that Speculator A will soon be receiving delivery of physical oil, whereas Speculator B will soon be expected to deliver physical oil. Neither party has the intention to either receive or deliver oil, meaning that both speculators simply wish to settle out their contracts for cash.
The way that both speculators can accomplish their goal is by engaging in an against actual transaction, exchanging their futures contracts with one-another. Since the price of oil fell, Speculator A would pay an extra premium to Speculator B to reflect the fact that Speculator B’s futures contract was more valuable. This way, both traders are able to realize their losses and profits without needing to take or make physical delivery.