An exchange of futures for physical (EFP) is a contract between two parties where one party exchanges a futures contract for the delivery of the underlying asset. This is the opposite of a regular futures trade, where the parties agree to trade a futures contract at an agreed-upon price in the future. In an EFP, the futures contract is exchanged for an existing position in the underlying asset.

The use of an EFP is popular in the commodities markets, especially in oil and gas, Agriculture, foreign currency and metals. If a large transaction takes place, it is beneficial to use an EFP compared to a regular futures trade as the large market trade would not have an unnecessarily large effect on the futures price. EFPs also allow producers to effectively hedge their risks or give producers greater control over the amount of commodities produced.

EFPs are an over-the-counter transaction that takes place between two parties, meaning that the traders must look for their own counterparty. This means that pricing will vary and prices are negotiable between the parties. Unlike an exchange traded futures contract, the EFP contract is bespoke and customised to the needs of the two parties and can incorporate additional features such as options or other derivatives.

EFPs are an appealing alternative to futures contracts for many commodities producers. They bypass the threat of additional market volatility that typically occurs when large trades in the futures markets occur. Moreover, EFPs can provide better pricing, as the two parties have more control on the counterparty and the trading terms of the contract itself. Furthermore, the ability to bring in options and other derivatives to the contract can be beneficial to both parties.

Overall, an exchange of futures for physical (EFP) is a versatile trading tool for commodities producers and other market participants who are looking for a bespoke trade with less market risk. The ability to step outside of a traditional futures contract and bespoke features such as the inclusion of other derivatives can provide the producing parties with greater control over the trading terms of the contract.