A transaction or trade which eliminates or closes off a position already taken in an option, futures contract, or swap, or any derivative combination. For example, a short call could be offset by holding a long call with the same expiration date and underlying and at the same strike price.
This may also refer to a position that features an identical but opposite market price or rate move, such that the market risk of a pre-existing position is partially or wholly cancelled. However, this doesn’t eliminate the credit risk of that position.
