Allowances

DEFINITION of 'Allowances'

A deviation from the basis grade or location allowable when delivering commodities under the terms of a futures contract. Allowances represent a premium or discount to the standards outlined in the futures agreement.

BREAKING DOWN 'Allowances'

Under a futures contract, the deliverables are standardized to a specific quality of good or delivery location. For example, an oil futures contract might require you to deliver 1,000 barrels of crude with an 850 kg/m³ density and 2% sulfur content. Allowances are made to these standards, since it might not be possible to find the specific good in a reasonable amount of time. For this example, an allowance may allow the seller to deliver within a range of 10 kg/m³ for density and 0.5% for sulfur.

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