How to close the European contract transaction

To close a European contract, determine the contract closure date, calculate profit/loss, enter the opposite contract position, settle the profit/loss, close the position on the exchange, and monitor the transaction.

Jan 27, 2025 at 02:00 am

Key Points:

• Conclude a European Contract in Just 6 Steps
• The Procedure for Closing a European Contract Position
• Commission Structure for European Contract Trading
• Risks Associated with European Contract Trading
• Comparison of European Contracts with Other Derivatives
• FAQs on European Contract Trading

How to Close a European Contract Transaction

1. Determine the Contract Closure Date:

   • The closure date is set at the time the contract is opened.
   • The typical contract duration is one month, but shorter (weekly) or longer (quarterly) contracts are available.

2. Calculate the Profit/Loss:

   • Calculate the difference between the opening and closing prices.
   • If the closing price is higher, you make a profit; if it's lower, you incur a loss.

3. Enter the Opposite Contract Position:

   • To close the contract, enter a new contract with the opposite position.
   • For example, if you initially bought a contract, you would now sell a contract of the same underlying asset, expiry date, and strike price.

4. Settle the Profit/Loss:

   • The profit/loss difference from the initial contract opening and closure is settled on the contract expiry date.
   • The settlement amount is transferred to your account or deducted from your margin.

5. Close Your Position on the Exchange:

   • Once you enter the opposite contract position, you must close it on the exchange platform where your account is connected.
   • Select the "close position" option for the contract you wish to close.

6. Monitor the Transaction:

   • Track the settlement on the expiry date to ensure the profit/loss is correctly reflected in your account.
   • The transaction details will be available on the exchange's trade history dashboard.

Commission Structure for European Contract Trading

• Execution Fee: Paid to the broker for executing the trade order.
• Clearing Fee: A charge levied by the clearinghouse for handling the settlement.
• Exchange Fee: A fee incurred for accessing the exchange trading platform.
• Spread: The difference between the bid and ask prices of the contract.

Risks Associated with European Contract Trading

• Price Volatility: Market price fluctuations can lead to substantial losses.
• Margin Call: If the account balance falls below the required margin, the broker may issue a margin call, requiring additional funds or closure of the position.
• Counterparty Risk: The risk of the contract counterparty defaulting on the settlement payment.
• Technical Errors: Errors in order execution or settlement can result in financial losses.

Comparison of European Contracts with Other Derivatives

• American Options: Can be exercised at any time before the expiry date, while European contracts can only be exercised on the expiry date.
• Futures Contracts: Obligate the holder to buy or sell an underlying asset at a specified price and date, while European contracts grant the right but not the obligation.
• CFD Contracts: Represent a contract-for-difference based on an underlying instrument, while European contracts are standalone contracts.

FAQs on European Contract Trading

• Q: What are the advantages of European contracts over other derivatives?

  • A: European contracts offer flexibility in strike prices and expiry dates, with lower margin requirements compared to futures contracts.

• Q: What are the main differences between exchange-traded and OTC European contracts?

  • A: Exchange-traded contracts are standardized and traded on a centralized exchange, while OTC contracts are customized and traded over the counter with a dealer.

• Q: How do European contract prices compare to underlying asset prices?

  • A: The contract price reflects the underlying asset's current price plus the premium or discount based on strike price, time to expiry, and market conditions.

• Q: What is a European contract's gamma exposure?

  • A: Gamma measures the sensitivity of a contract's delta to changes in the underlying asset's price. High gamma exposure indicates increasing delta with price changes, which can amplify profit/loss.

• Q: How do I manage risk when trading European contracts?

  • A: Employ risk management strategies such as position sizing, stop-loss orders, and hedging to limit potential losses.