A bookout, sometimes spelled out as book out or book-out, is the closing out of an open position in a swap contract or other over-the-counter (OTC) derivative before it matures. The term may also be interpreted as the agreement to cancel outstanding contracts by each of the parties involved through a cash settlement of the difference between the price specified in the contract and an acceptable reference price.
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 canceling a swap or derivative before its maturity date is called a bookout. When a trader or investor puts a bookout in place, they generally do so with contracts that are traded between two parties without the use of an exchange–making them wholly private contracts. These products include securities like exotic options and forward rate agreements.
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 position to cover the contracted amount. Bookouts on a short position are done by taking a long position, while long positions are booked out by taking a short position.
As noted above, bookouts involve swaps or other contracts that are traded OTC. A swap is a type of derivative contract or agreement that allows both parties to exchange future cash flows. Swaps can be based on many different variables such as the price of commodities, currency exchange rates, or interest rates.
The most common type of swap is the interest rate swap–a forward contract where a series of future interest payments are exchanged for an agreed-upon principal amount. These contracts are traded OTC, which means the two parties make the agreement privately and bypass the need for a formal exchange.
Bookouts are widely used in 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.