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. Basis Grade

    Basis grade is the minimum acceptable standard required for a ...
  2. Cash Contract

    A cash contract is a financial arrangement that requires delivery ...
  3. Wide Basis

    A condition found in futures markets in which the spot price ...
  4. Basis Risk

    Basis risk is the risk that offsetting investments in a hedging ...
  5. Contract Size

    A contract size is the deliverable quantity of commodities or ...
  6. Minimum Price Contract

    A minimum price contract is a forward contract that guarantees ...
Related Articles
  1. Investing

    What are Commodities?

    A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type. Commonly traded commodities include gold, beef, oil, lumber and natural gas. Additional ...
  2. Investing

    Why Low Fuel Prices Aren't Enough for EU Airlines

    Low jet fuel prices alone are not enough to guarantee success in Europe’s fragmented airline market.
  3. Investing

    Trading The Soft Commodity Markets

    Learn the contract specifications for a few of the most heavily traded commodities.
  4. Investing

    4 Ways Airlines Hedge Against Oil

    Understand what a fuel hedge is and why an airline company would want to implement a hedging strategy. Learn about the different fuel hedging strategies.
  5. Investing

    Why Delta is Done Hedging Fuel Costs (AAL, DAL)

    Delta lost $336 million on its hedges in the last three months of the year, and while it is not taking out any new contracts for 2016, the losses on existing contracts are expected to continue, ...
  6. Investing

    Oil Is Down, Why Are Airlines Not Lowering Prices?

    The price of oil has dropped more than 50% in a year, but airline ticket prices are still high. Why have airlines not lowered ticket prices?
  7. Investing

    What is a Forward Contract?

    A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date.
  8. Investing

    How to Use Commodity Futures to Hedge

    Both producers and consumers of commodities can use futures to hedge. We explain, using a few examples, how to achieve commodity hedging with futures.
RELATED FAQS
  1. Why do companies enter into futures contracts?

    Learn how companies use futures contracts for the purposes of hedging their exposure to price fluctuations as well as for ... Read Answer >>
  2. Which major expenses affect airline companies?

    Discover the major expenses that airlines must pay. The two largest are labor costs and fuel costs, with fuel costs being ... Read Answer >>
  3. Why are futures contracts important?

    Learn about social and economic functions of futures contracts and the futures market, and discover why speculators help ... Read Answer >>
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  3. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  4. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
Trading Center