Exchange of Futures for Physical (EFP)

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Definition of 'Exchange of Futures for Physical (EFP)'

An Exchange of Futures for Physical (EFP) is a transaction in which a party agrees to sell a futures contract and simultaneously buy the underlying physical commodity. The EFP is a cash-settled transaction, meaning that the parties exchange the cash difference between the futures price and the spot price of the underlying commodity.

EFPs are often used by hedgers to manage their exposure to commodity price risk. For example, a farmer who is concerned about the potential for a decline in the price of corn may enter into an EFP to sell corn futures and buy corn at the current spot price. This will lock in the farmer's profit if the price of corn declines, but it will also limit the farmer's upside potential if the price of corn increases.

EFPs can also be used by speculators to take advantage of expected changes in commodity prices. For example, a speculator who believes that the price of oil is going to rise may enter into an EFP to buy oil futures and sell oil at the current spot price. This will allow the speculator to profit if the price of oil rises, but it will also expose the speculator to losses if the price of oil falls.

EFPs are typically traded on over-the-counter (OTC) markets, but they can also be traded on exchanges. The Chicago Mercantile Exchange (CME) offers EFP contracts for a variety of commodities, including corn, soybeans, wheat, and crude oil.

EFPs are a complex financial instrument and should only be used by investors who understand the risks involved.

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