Exchange for Physical

Definition

The term Exchange for Physical refers to a privately negotiated trade involving the exchange of a futures position for the actual physical asset. Exchange for Physical is one of several Exchange for Related Positions (EFRP) transactions.

Explanation

An Exchange for Physical (EFP) is one of several Exchange for Related Positions (EFRP) trades authorized under Rule 538. An EFP involves the exchange of a futures position for the actual underlying commodity outlined in the futures contract. In order to conduct this transaction:

  • The buyer (seller) of the cash commodity must also be the buyer (seller) of the futures contract.
  • The quantity of the cash commodity must be approximately equal to the futures contract.
  • The cash commodity should involve the same underlying asset, or a by-product of the asset, specified in the futures contract.

EFP transactions provide investors with a means of moving between a futures contract and the underlying asset while eliminating the risk associated with an intraday market trade. As is the case with other types of EFRPs, the transaction occurs as a privately negotiated exchange in positions. EFPs provide the added advantages of allowing investors to balance their portfolio in terms of leverage, capital and liquidity exposure.

The other authorized EFRP trades include Exchange for Risk (EFR), Exchange of Options for Options (EOO) and Exchange for Swap (EFS).

Related Terms

exchange traded fundexchange of options for optionsexchange for swapexchange for riskexchange certified stocks