{ "id": "19d740ef-cd61-5444-ae48-f9896db79460", "slug": "delivery", "term": "Delivery", "aliases": [], "category": "Derivatives & Options", "category_slug": "derivatives-options", "difficulty": "basic", "definition": "Delivery in futures markets refers to the physical transfer of the underlying commodity, financial instrument, or asset from the seller (short futures position holder) to the buyer (long futures position holder) to fulfill a futures contract taken to expiration, as an alternative to cash settlement or offset through an opposing trade. The delivery process is governed by detailed exchange rules specifying eligible grades, delivery locations, timing, and logistics.", "key_takeaways": [ "Most futures contracts are never settled by physical delivery; over 95% are offset (closed out) before expiry, with physical delivery representing a small fraction of total futures volume.", "Delivery specifications are precisely defined in each contract's rulebook: for commodity futures, this includes acceptable grades, approved warehouses, delivery windows, and quality adjustments.", "The seller (short position) typically has delivery options—the right to choose when, where, and what grade to deliver within specifications—creating embedded optionality known as the 'short's delivery options.'", "Cash-settled futures (equity index futures, Eurodollar futures, most cryptocurrency futures) have no physical delivery mechanism—the contract simply settles to the official fixing price at expiry.", "Basis trading—arbitraging between futures and spot markets—relies on the convergence of futures and spot prices at expiry enabled by the delivery mechanism." ], "detailed_explanation": "Physical delivery is the mechanism by which futures contracts maintain their economic connection to the underlying spot market, ensuring that futures prices converge to spot prices at expiration and enabling the contracts to serve their intended hedging function. While actual delivery rates are minimal—commodity hedgers typically roll futures forward rather than delivering physical goods, and financial futures are often cash-settled—the theoretical availability of delivery creates the arbitrage discipline that aligns futures prices with spot reality.\n\nThe delivery process for commodity futures involves multiple steps and participants beyond just the long and short positions. Approved warehouses or delivery points must be registered with the exchange; for CBOT corn, approved delivery points include elevators along the Illinois and Chicago rivers. Sellers preparing to deliver must arrange transportation of the physical commodity to the delivery point, obtain grading certificates confirming the delivered grade meets contract specifications, and submit delivery notices to the clearinghouse within the prescribed timeframe.\n\nGrading and quality specifications are particularly important in agricultural commodity delivery. CBOT corn futures specify No. 2 Yellow Corn as par grade, with delivery adjustments for other grades: No. 1 Yellow commands a premium, while lower grades receive discounts. This grading system creates the 'quality option' for the short—the right to deliver the cheapest acceptable grade—an embedded optionality that affects futures pricing relative to a simple spot forward contract. Similarly, Treasury futures' cheapest-to-deliver (CTD) option arises from the short's ability to choose which eligible Treasury security to deliver, selecting the one that maximizes profit given the current yield curve shape.\n\nFor physically settled contracts, the delivery calendar is strictly controlled to prevent market disruptions. First notice day (the first day on which the short can submit a delivery notice) typically falls several days before the last trading day, after which the short must take or make delivery. This creates a critical window during which positions that cannot be physically settled must be rolled or offset. Traders who inadvertently hold long positions into the delivery period—particularly those without facilities to accept physical delivery—may face significant costs and operational difficulties, a phenomenon colloquially known as being 'squeezed.'", "example": "A grain merchandiser uses CBOT corn futures to lock in a purchase price for corn. In October, it holds long 500 December corn futures at $5.50/bushel (representing 2.5 million bushels). Rather than offsetting the position before first notice day, the merchandiser accepts delivery notices on 300 contracts. It receives warehouse receipts for 1.5 million bushels of No. 2 Yellow Corn stored at an approved Chicago-area elevator, paying $5.50/bushel plus accrued storage and insurance costs. The merchandiser immediately sells the physical corn to a local ethanol plant at the spot cash price of $5.53/bushel—the 3-cent premium over futures reflecting local basis. The remaining 200 contracts are offset in the market at $5.49, closing the futures position at a slight loss that is offset by the basis gain on the delivered grain.", "formula": "Delivery Invoice Price = Futures Settlement Price × Conversion Factor + Accrued Interest (for Treasury futures); Commodity: Invoice = Settlement Price ± Grade Adjustments ± Location Differentials", "formula_latex": null, "interactive_type": null, "calculator_id": null, "related_terms": [ "arbitrage", "basis", "cash-settlement", "cheapest-to-deliver", "chooser-option", "current-yield", "delivery-notice", "delta", "exchange", "forward-contract", "futures-contract", "hedging", "in-the-money", "iron-butterfly", "option" ], "backlinks": [ "accrual-accounting", "back-months", "backwardation", "basis", "basis-risk", "binomial-tree-model", "board-of-trade", "book-transfer", "brent-crude-oil", "buyers-call", "cash-forward-sale", "cash-settlement", "certified-stocks", "cheapest-to-deliver", "circuit-breaker", "clearing", "commodity-convenience-yield", "commodity-index", "contango", "contract-grade", "contract-month", "convergence", "crack-spread", "credit-default-swap", "declaration-date", "deferred-futures", "delivery-notice", "designated-contract-market", "discount-futures", "dominant-future", "economically-deliverable-supply", "energy-commodities", "exchange-for-physicals", "expiration-date", "final-settlement-price", "forward-market", "funding-rate", "futures-contract", "futures-curve", "futures-price", "ginzy-trading", "grading-certificate", "gross-margin", "gsci-goldman-sachs-commodity-index", "hard-position-limit", "hedging", "henry-hub", "impact-investing", "implied-repo-rate", "indenture", "inverted-market", "job-lot", "knock-out-option", "last-notice-day", "long-hedge", "long-the-basis", "lookback-option", "natural-gas", "nfa-membership", "open-interest", "operational-risk", "option", "performance-bond", "physical-commodity", "physical-settlement", "position-limit", "price-banding", "prompt-date", "quality-of-earnings", "revenue-recognition", "roll-over", "selling-hedge", "settlement", "settlement-risk", "short-selling", "span-margining", "speculative-limit", "split-close", "spot-month", "spot-price", "spot-rate", "squeeze-short-squeeze", "stock-buyback", "storage-cost", "strangle", "synthetic-futures", "t-2-settlement", "ted-spread", "time-spread", "treasury-note", "twap-order", "uncovered-option", "vault-receipt", "visible-supply", "volatility-skew", "vwap-order", "warehouse-receipt", "wild-card-option", "wti-crude-oil" ], "cross_references": [ "arbitrage", "basis", "cash-settlement", "cheapest-to-deliver", "current-yield", "delivery-notice", "exchange", "forward-contract", "futures-contract", "hedging", "option", "physical-commodity", "premium", "settlement", "yield", "yield-curve" ], "tags": [ "level:basic", "cat:derivatives-options" ], "asset_classes": [ "derivatives" ], "regulators": [], "see_also": [], "sources": [], "wordcount": 703, "checksum": "2cab72cdb3d3d4e1", "version": "2026.05.03", "license": "CC-BY-4.0", "updated_at": "2026-09-07T02:15:24+00:00", "_links": { "self": "https://hedgefund.wiki/api/v1/terms/delivery", "jsonld": "https://hedgefund.wiki/api/v1/terms/delivery?format=jsonld", "markdown": "https://hedgefund.wiki/api/v1/terms/delivery?format=md", "graph": "https://hedgefund.wiki/api/v1/graph/delivery", "category": "https://hedgefund.wiki/api/v1/categories/derivatives-options", "schema": "https://hedgefund.wiki/schema/term.schema.json", "html": "https://hedgefund.wiki/#/terms/delivery" } }