Delivery

DEFINITION of 'Delivery'

Delivery is the action by which a commodity, a currency, a security, cash or another instrument that is the subject of a sales contract is tendered to and received by the buyer.

Delivery can occur in spot, option or forward contracts. However, in many instances, a contract is closed out before settlement and no delivery occurs.

BREAKING DOWN 'Delivery'

Delivery is the final stage of a contract for the purchase or sale of an instrument. The price and maturity are set on the transaction date. Once the maturity date is reached, the seller is required to either deliver the instrument if the transaction has not yet been closed out or reversed or close it out at that point and settle the gain or loss for cash.

Transactions In Which Delivery Is Common

Currency transactions to pay for imports or receive export proceeds are often delivered. An importer in the United States who needs to pay for goods from Europe would enter into a contract to buy euros. At maturity, the importer delivers dollars to its bank counter-party, and the bank delivers euros to the supplier. This applies to both spot and forward transactions.

A contract for the purchase of a stock or commodity for immediate settlement is usually delivered.

Transactions In Which Delivery Is Less Common

An option gives its owner the right but not the obligation to buy or sell something at a stipulated price on or before an agreed date. If the option expires in the money, the holder of the option can either exercise it and take delivery of the underlying instrument or sell the option to make a profit. An option that is in the money can also be sold before the exercise date. The choice of delivering or closing out the option depends on the business needs of its owner.

Transactions That Are Not Delivered

Speculative traders don't take delivery. They buy and sell multiple times for delivery on the same date. The gains and losses are netted against each other, and only the difference is settled. Trades that are done outside of exchanges and are not intended for delivery are often covered by ISDA agreements, which stands for the International Swaps Dealer Association. These agreements set out the terms and conditions for the settlement of offsetting contracts, known as netting, and reduce the associated credit risk.

Futures contracts are similar to forwards but are for standardized amounts and dates; they are bought and sold on exchanges. If held to maturity, they are cash settled for the gain or loss on the contract. They can also be sold back to the exchange prior to maturity. In that case, the gain or loss is settled at the time of the sale, not at maturity.

A subsection of forwards that must be closed out and netted is the "non-deliverable forward" (NDF). They are designed to hedge exposure in currencies that are not convertible or are very thinly traded. NDFs are usually covered by an ISDA agreement.

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