A transaction that cancels or eliminate market risk in an open position. It cancels out or eliminates the effects of a trade by taking another position but in opposite direction. It is an activity that removes the benefits and risks of another transaction or situation. The offsetting transaction can take place in any market but typically refer to futures, exotic instrument and options market.
In trading, the offsetting transaction is like a risk management instrument that lets the entities and traders to moderate the possibly harmful outcome that could arise if they could not simple withdraw the actual position.