What Is a Bookout?
A bookout means to close out an open position in a swap contract or other over-the-counter (OTC) derivative before it matures. The term bookout may also be interpreted as the agreements to cancel outstanding contracts by the parties involved through a cash settlement of the difference between the price specified in the contract and an acceptable reference price.
- A bookout means to close out an open position in a swap contract or other over-the-counter derivative before it matures.
- Bookouts can be done by taking an offsetting position in another contract, paying the other party the market value of the agreement, or by taking a long or short position to cover the contracted amount.
- Bookouts are widely used in the electric utility, and oil and gas industries for power scheduling and shipping convenience.
The act of cancelling a swap or derivative that is traded over the counter before its maturity date is called a bookout. These are contracts that are generally traded between two parties without the use of an exchange. This makes them private contracts. These products include securities like exotic options and forward rate agreements. The term can also be spelled out as book out or book-out.
Bookouts can be done in a variety of ways. The party can take an offsetting position in another contract, pay the opposite party the market value of the agreement, or take a long or short the position in question to cover the contracted amount. So, bookouts on a short position are done by taking a long position, while long positions are booked out by taking a short position.
Types of Bookouts
Bookouts are widely used different industries that deal with commodities such as the electric utility sector. Providers use them for power scheduling and shipping 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. In the oil and gas industry, two different companies that ship gas may agree to transfer title to the physical commodity at one location without moving the gas through the operator of a pipeline.
The Financial Accounting Standards Board (FASB) has specific rules that govern this type of netting. The FASB mandates that financial instruments subject to bookouts be accounted for using mark to market (MTM) accounting through the income statement.