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What Is the Delivery Price? Example & How it’s Used

Last updated 03/19/2024 by

Alessandra Nicole

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Summary:
The delivery price, a key component in financial contracts such as futures and options, represents the agreed-upon cost for delivering the underlying asset. It remains fixed from contract inception, contrasting with fluctuating market prices, ensuring stability in contractual agreements.

What is the delivery price?

The delivery price denotes the predetermined cost at which one party commits to delivering the underlying asset and the counterparty agrees to accept the delivery. It’s an essential concept in futures contracts traded on registered exchanges or in over-the-counter forward agreements.

Delivery price explained

Primarily, the delivery price is established at the contract’s initiation, often equating to the forward price. However, while the forward price fluctuates over time, the delivery price remains constant. Typically, actual physical delivery of assets seldom occurs; instead, positions are closed out with offsetting contracts or through the transfer of a delivery instrument representing the underlying asset.
When physical delivery does happen, the expenses related to the commodity’s delivery impact the overall cost of the contract. Unlike other prices, such as the spot price or the costs associated with initiating or closing out new contracts, the delivery price remains unchanged from the contract’s commencement until its conclusion.
Weigh the risks and benefits
Here is a list of the benefits and the drawbacks to consider.
Pros
  • Stability: The unchanging nature of the delivery price offers predictability in contractual obligations.
  • Contractual clarity: Parties involved have a clear and agreed-upon price, minimizing uncertainty.
  • Reduced risk: Parties can better manage risk by having a fixed price for delivery.
Cons
  • Impact of delivery costs: Expenses related to actual commodity delivery can affect the overall contract cost.
  • Unresponsive to market changes: The fixed delivery price does not adjust according to market fluctuations, potentially impacting parties’ positions.
  • May limit opportunities: Fixed delivery price may limit potential gains if market conditions change favorably.

Frequently asked questions

How does the delivery price impact market stability?

The delivery price, remaining fixed throughout the contract, provides stability by offering a predetermined cost for the delivery of the underlying asset, ensuring predictability for both parties involved.

Is the delivery price subject to market fluctuations?

No, the delivery price, established at the contract’s initiation, does not change, distinguishing it from other market prices that may fluctuate based on market conditions.

Key takeaways

  • The delivery price remains fixed throughout the contract’s duration, offering stability and predictability.
  • It contrasts with fluctuating market prices, such as the spot price or costs associated with entering or exiting contracts.
  • Understanding the delivery price is crucial in distinguishing the fixed aspect of a contract from fluctuating market rates.
  • It offers clarity and reduces uncertainties between involved parties in financial contracts.

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