What is a single stock future EFP?

Overview: 

 

The EFP allows for the swap of a long or short stock position for a single stock future, maintaining the same economic long or short position but at more advantageous financing rates and margin requirements.  The cost to carry interest rate implied by the single stock future’s price is generally below the rate charged to purchasers of stock who buy on margin, and greater that that provided to sellers of stock on the sale proceeds.

 

Long Stock – alternative is to buy the EFP which involves a single transaction with two legs, a long future and short stock.  The effect of the transaction is to close the long stock position with the short stock position and maintain a long futures position through expiration.  The cost of financing the long stock (margin loan rate * 75% of stock price, less any dividends received) tends to be greater than the EFP cost (EFP premium at ask over stock, plus commission, less interest earned on margin balance).

 

Short Stock – alternative is to sell the EFP which involves a single transaction with two legs, a short future and long stock.  The effect of the transaction is to close the short stock position with the long stock position and maintain a short futures position through expiration.  There is generally a cost associated with holding the stock short (dividends paid in lieu, less interest earned on 30% margin balance, less interest earned on sale proceeds, if any) as opposed to the credit earned on the EFP (EFP premium at bid over stock, plus interest earned on margin balance, less commission).

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