Deliverable Grades

AAA

DEFINITION of 'Deliverable Grades'

The deliverable grade specifies the minimum quality of the commodity that is to be delivered under a contract. Carefully specifying the deliverable grade ensures that both parties to the contract agree on precisely what is to be delivered, allowing the contract to be priced correctly. For any given commodity, there are many different grade and types.


For example, oil comes in many different qualities, with much different prices for each grade. If a minimum deliverable grade is poorly specified, the deliverer can profit at the expense of the acquirer by delivering a cheaper, lower quality grade than was anticipated by the contract price.

BREAKING DOWN 'Deliverable Grades'

In the futures market, firms often wish to hedge their risk to changing prices by entering contracts to buy certain commodities in advance. For example, suppose an airline wishes to hedge its risk to changes in future jet fuel prices. The airline could enter into a contract to buy a certain quantity of jet fuel, and have it delivered in the future. There are many different types of jet fuel, each with different prices, so such a contract would specify the minimum grade of fuel to be delivered. If a minimum deliverable grade is not specified, the deliverer would invariably deliver the cheapest fuel. In this situation, the airline might have overpaid considerably and it might receive jet fuel unsuitable for its purposes.

RELATED TERMS
  1. Commodity

    1. A basic good used in commerce that is interchangeable with ...
  2. Futures Market

    An auction market in which participants buy and sell commodity/future ...
  3. Futures

    A financial contract obligating the buyer to purchase an asset ...
  4. Commodity Futures Trading Commission ...

    An independent U.S. federal agency established by the Commodity ...
  5. Outright Futures Position

    A long or short trade on an underlying futures contract that ...
  6. Futures Contract

    A contractual agreement, generally made on the trading floor ...
Related Articles
  1. Active Trading

    Uncovering Oil And Gas Futures

    Find out how to stay on top of data reports that could cause volatility in oil and gas markets.
  2. Active Trading

    Commodities: The Portfolio Hedge

    These diverse asset classes can provide downside protection and upside potential. Find out how to use them.
  3. Active Trading

    Take A Tour Of The Futures Trading Pit

    Discover why controlled chaos can mean an exciting investment experience for you.
  4. Options & Futures

    Trading Gold And Silver Futures Contracts

    If you are a hedger or a speculator, gold and silver futures contracts offer a world of profit-making opportunities.
  5. Options & Futures

    Fueling Futures In The Energy Market

    The energy market influences every aspect of our lives, and these four options are its driving force.
  6. Active Trading

    Learn To Corral The Meat Markets

    Find out how to trade these hog-wild commodities.
  7. Active Trading

    How Companies Use Derivatives To Hedge Risk

    Derivatives can reduce the risks associated with changes in foreign exchange rates, interest rates and commodity prices.
  8. Fundamental Analysis

    Explaining the Central Limit Theorem

    Central limit theorem is a fundamental concept in probability theory.
  9. Mutual Funds & ETFs

    ETF Analysis: United States Gasoline Fund

    Learn about the United States Gasoline Fund, the characteristics of the exchange-traded fund, and the suitability and recommendations of it.
  10. Mutual Funds & ETFs

    ETF Analysis: United States 12 Month Oil

    Find out more information about the United States 12 Month Oil ETF, and explore detailed analysis of the characteristics, suitability and recommendations of it.
RELATED FAQS
  1. Can mutual funds invest in commodities?

    Mutual funds can invest in commodities. In fact, mutual funds may provide a better way for investors to gain exposure to ... Read Full Answer >>
  2. How do futures contracts roll over?

    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>
  3. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  4. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  5. Why do companies enter into futures contracts?

    Different types of companies may enter into futures contracts for different purposes. The most common reason is to hedge ... Read Full Answer >>
  6. What does a futures contract cost?

    The value of a futures contract is derived from the cash value of the underlying asset. While a futures contract may have ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Recession

    A significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, ...
  2. Bubble Theory

    A school of thought that believes that the prices of assets can temporarily rise far above their true values and that these ...
  3. Stock Market Crash

    A rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, ...
  4. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  5. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  6. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!