how an offset works
offsetting is used in several types of businesses its effect is to remove or limit liabilities businesses may offset losses in one business division by reallocating gains from another this allows the profitability of one activity to support the other activity for example a business that is successful in the smartphone market may decide to produce a tablet as a new product line the profits from smartphone sales can help offset the early losses associated with expanding into a new arena similarly companies with global sales may offset losses in one currency with gains in another one unit may have risk exposure to a decline in the swiss franc compared to the euro while another may benefit from a declining franc offsetting in derivatives contractsinvestors offset futures contracts and other investment positions to remove themselves from any associated liabilities almost all futures positions are offset before the terms of the futures contract are realized even though most positions are offset near the delivery term the benefits of the futures contract as a hedging mechanism are still realized a futures contract is an agreement to purchase a particular commodity at a specific price on a future date if a contract is held until the agreed upon date the investor could become responsible for accepting the physical delivery of the commodity in question the purpose of offsetting a futures contract on a commodity for most investors is to avoid having to physically receive the goods associated with the contract in the options markets traders often look to offset certain risk exposures sometimes referred to as their greeks for instance if an options book is exposed to declines in implied volatility long vega a trader may sell related options to offset that exposure or if an options position is exposed to directional risk a trader may buy or sell the underlying security to become delta neutral dynamic hedging or delta gamma hedging is a strategy employed by derivatives traders to maintain offsetting positions on an ongoing basis 