Exchange of Futures for Physical (EFP)
What Is Exchange of Futures for Physical?
An exchange of futures for physical (EFP) is a private agreement between two gatherings to trade a futures position for the basket of underlying actuals. An exchange of futures for physicals can be utilized to open a futures position, close a futures position, or switch a futures position for the underlying asset.
Understanding Exchange of Futures for Physical (EFP)
Exchange of futures for physical (EFP) is a rare example of types of privately negotiated agreements that can then be registered with the exchange. The volume associated with the transaction is displayed in the days' trading when the transaction is registered, yet the price at which the transaction was completed (the privately agreed upon price between the gatherings) isn't revealed.
At the point when two gatherings have agreed to an exchange of futures for physicals, they then register the transaction with the important exchange. Exchange of futures for physical is additionally alluded to as exchange of futures for product and exchange of futures for cash (as in cash commodity). The term exchange of futures for physical is generally used to depict transactions of this nature even when the underlying are financial products rather than cash commodities. Exchange of futures for swap (EFS) can be utilized on the off chance that the futures position is being traded for a swap contract.
Illustration of Exchange of Futures for Physical
The most common instances of the exchange of futures for physical is in the oil and gas sector. This seems OK, as these types of transactions are not finished by small traders and examiners. EFPs will generally include large commercial and non-commercial traders. Envision an oil and gas producer is perched on an inventory of 1,000,000 barrels on the assumption that prices are trending up. A purifier who is stressed over prices going up needs to secure barrels of oil from here on out, so they buy 1,000 contracts addressing a contract unit of 1,000 barrels, each for a total of 1,000,000 barrels.
The purifier and the producer get to talking and they understand that a) they are both bullish on the price of oil and b) they can switch positions to satisfy each other's requirements. They consent to a price and delivery date in the future where the producer hands over the physical oil to the purifier — securing in the purifier's stock — and gets the futures in return, permitting the producer to proceed with the bullish position on oil prices. This large transaction is registered with the exchange, yet it doesn't impact the price of oil since pricing data isn't disclosed. So the purifier has closed out a futures position and the producer has opened one.
Benefits of Exchange of Futures for Physical
The undeniable inquiry is the reason not just do the transaction through the market? The response is essentially for productivity. Large transactions impact the market as they are executed. To this end large traders now and again break up transactions over opportunity to reduce the impact of slippage. Doing the exchange for futures outside the market pricing mechanism permits large, offsetting transactions to happen at a chose price. EFP is likewise utilized when the market depth can't retain the transaction — for instance, a transaction including large number of contracts.
Features
- EFPs are particularly helpful when a large transaction happens so the market price isn't misleadingly altered by a non-speculative trade.
- An exchange of futures for physical (EFP) considers one party to swap a futures contract for the genuine underlying asset.
- EFPs are traded over-the-counter (OTC) and are frequently utilized by commodities producers to hedge positions or manage production.
