Investing: inverse transaction

A transaction that can cancel out a forward contract that has the same value date. Inverse transactions are used with options and forwards, leaving the investor with a fixed gain or loss when the transaction is closed. An inverse transaction is considered the transaction that “undoes” or closes out a previous transaction made by an investor.

Investors purchasing forwards can choose to take possession of the underlying asset, such as currency, at the time of expiration or can close the contract out before the expiration date is reached. To close out the position, the investor must buy or sell an offsetting transaction. An inverse transaction can be made through a clearing house, which matches the transaction details from the investor with the transaction details of an outside buyer or seller.