Exchange of futures for physicals offers several hedging strategies for volatile markets

Exchange of futures for physicals (EFP), as applied to the Nymex energy complex, is in its simplest form, a mechanism for pricing a contract for physicals made basis a futures price, or exchanging a futures position (either long or short) for a similar position in the physical market. The level at which the futures are exchanged becomes the reference price used to establish the final flat price for the physical transaction. In most cases, EFPs are used to manage price risk, and at the same time, establish contractual commitments in the cash market with terms and conditions that are tailored to the needs of industry participants. Hence, EFPs nominally combine the making or taking of delivery of petroleum products against Nymex futures positions, but they are primarily used by the industry to hedge transactions and fix prices for cash deals. Most future markets are used primarily by commercial participants to hedge exposure to changing prices. Some future markets have no mechanism for the actual delivery of the physical commodity; settlement is made in cash. In most markets where there is a physical delivery, most positions are unwound before the delivery date. Likewise, actual delivery under Nymex energy contracts constitutes amore » small percentage of the total number of contracts traded.« less