DEFINITION of ‘Bookout’
A bookout is to close out an open position in an OTC derivative, such as a swap contract, before it matures. This can be done in a multitude of ways. The party can take an offsetting position in another contract, paying the opposite party the market value of the agreement, or by going long or short the position in question to cover the contracted amount. A bookout may also be interpreted as an agreement to cancel an outstanding contract by the parties involved, through cash settlement of the difference between the price specified in the contract and an acceptable reference price.
BREAKING DOWN ‘Bookout’
Bookouts are widely used in the electric utility industry for power scheduling 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. The Financial Accounting Standards Board has specific rules that govern such “netting;” the FASB mandates that financial instruments subject to bookout be accounted for using mark-to-market accounting through the income statement.