What does it mean to liquidate a futures contract?
Futures Liquidation – Liquidation is any transaction that offsets or closes out a long or short futures position, it can also be known as an offset. Often times, liquidation is the act of selling off your futures position in exchange for cash.
Liquidation is when a trader's position is automatically closed out when their margin falls below a certain threshold, known as the liquidation price. The crypto futures exchange typically determines this threshold and is designed to protect both, the trader and the platform from excessive losses and market risks.
At its core, liquidity is the collective expression of traders' opinions on the market. Like any other market, these opinions are represented in a futures market either as existing positions held by traders, known as open interest, or as buy or sell orders communicated to the rest of the market but yet to be executed.
- Use leverage responsibly. Leverage can amplify your gains, but it can also amplify your losses. ...
- Set stop-loss orders. ...
- Monitor your margin ratio. ...
- Trade with a risk management plan.
The liquidation process means that traders are forced to close their position. The trader can suffer a partial, or even total loss of their initial margin. In other words, they cannot meet the margin requirements for the leveraged position. They simply have insufficient funds and cannot keep their trade open.
A liquidation is triggered when the portfolio value of a futures margin wallet falls below the maintenance margin required for all open positions in the futures margin wallet.
Liquidating assets can be good and natural in some cases, such as when an investor exits a position intentionally to realize profits or when a company liquidates assets to redeploy their value in an area it finds strategically important. However, forced liquidation is almost always a bad thing.
Crude oil leads the pack as the most liquid commodity futures market followed by corn and natural gas.
In futures markets, liquidity is primarily driven by the participation of a wide array of market participants, including hedgers, speculators, and arbitrageurs. Each group contributes to overall trading volume, which in turn, increases market liquidity.
The higher the volume and open interest, the more liquid the contract. After examining the Bloomberg Terminal screen, it appears that the contract with the highest liquidity is the CBSA Comdty.
Why is liquidation bad?
Liquidation involves the sale of all of a fund's assets and the distribution of the proceeds to the fund shareholders. At best, it means shareholders are forced to sell at a time, not of their choosing. At worst, it means shareholders suffer a loss and pay capital gains taxes too.
The company must cease trading during insolvency, otherwise it is deemed as improper and wrongful. If the appointed liquidator discovers signs of wrongful trading in their investigations, the company directors will be prosecuted.
A company in liquidation is not allowed to trade in the ordinary course of business because the primary objective of liquidation is to wind down the company's operations and distribute its assets to creditors in an orderly and fair manner.
When you liquidate a company, its assets are used to pay off its debts. Any money left goes to shareholders. You'll need a validation order to access your company bank account. If that money has not been shared between the shareholders by the time the company is removed from the register, it will go to the state.
Total liquidation involves selling off an entire trading balance to offset losses. It often occurs in forced liquidation when the lender is forced to close a position to prevent losing their capital. The trader, however, loses their entire invested capital and may end up with negative balances.
Liquidation is typically an option if your business is insolvent and can't pay its bill or debts. When your business is liquidated, any remaining assets are paid to creditors and shareholders.
To close an open position, you can take the opposite position in the same futures contract you are currently holding in your account. For example, to close an open long position in the March 2018 Crude Oil contract, you would place an order to sell the same number of contracts in the March 2018 Crude Oil contract.
It is not necessary to hold on to a futures contract till its expiry date. In practice, most traders exit their contracts before their expiry dates. Any gains or losses you've made are settled by adjusting them against the margins you have deposited till the date you decide to exit your contract.
Clearing firms, which are known as futures commission merchants in the US and general clearing members in Europe, perform several critical functions in the trading and clearing lifecycle for the futures markets.
Advantages Of Liquidating A Business
Ensures Staff Get Paid: If the business can't cover wages, your staff (and you, if you're an employee too) can claim owed pay from the Redundancy Payments Office.
What are the 3 types of liquidation?
- Creditors' Voluntary Liquidation. ...
- Compulsory liquidation. ...
- Members' Voluntary Liquidation (MVL) for solvent companies.
In this context, “liquidate” refers to the conversion of assets into cash, which can then be used to pay off debts or distribute to shareholders.
Fees for futures and options on futures are $2.25 per contract, plus exchange and regulatory fees. Note: Exchange fees may vary by exchange and by product. Regulatory fees are assessed by the National Futures Association (NFA) and are currently $0.02 per contract.
Speculators, meanwhile, aim to make money—to "buy low and sell high" (or vice versa). Just like in the equity market, speculators are looking to capitalize on the price fluctuations of the futures contract.
Indeed, futures can be very risky since they allow speculative positions to be taken with a generous amount of leverage. But, futures can also be used to hedge, thus reducing somebody's overall exposure to risk.
