Ex-Pit Transaction

Definition

The term ex-pit transaction refers to a commodity transaction that takes place away from the floor of the exchange where it would normally occur. Ex-pit transactions typically involve the cash market and a private deal between two hedgers.

Explanation

An ex-pit transaction involves the trading of a commodity contract away from the floor where it is normally traded. For example, the closing out of a futures position off the exchange floor. These deals are effective when two traders wish to close out their positions and they hold equal and opposite futures contracts as a hedge.

As part of this process, the hedgers would contact the exchange and request their contracts be canceled without making a trade. By doing so, their contracts cannot be called upon to deliver the commodity. Communicating with the exchange also ensures open interest in their contracts reflect the closing out of their positions.

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