What is 'Delivery'

Delivery is the action of transferring a commodity, currency, security, cash or another instrument that is the subject of a sales contract, and 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 International Swaps and Derivatives Association (ISDA) agreements, formerly known as the International Swaps Dealers 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.

RELATED TERMS
  1. Delivery Price

    The delivery price is the price at which one party agrees to ...
  2. Last Trading Day

    The last trading day is the final day that a futures contract ...
  3. Maturity

    Maturity refers to a finite time period at the end of which the ...
  4. Forward Delivery

    A delivery of the underlying asset at the date agreed upon in ...
  5. Buying Forward

    Buying forward is an investment strategy that involves the buying ...
  6. Long Dated Forward

    A long dated forward is a type of forward contract commonly used ...
Related Articles
  1. Trading

    The Difference Between Forwards and Futures

    Both forward and futures contracts allow investors to buy or sell an asset at a specific time and price.
  2. Trading

    Forward Contracts: The Foundation Of All Derivatives

    An investor can assess interest rate parity and implement covered interest arbitrage by using a currency forward contract to generate risk-free returns.
  3. Trading

    Understanding Non-Deliverable Forward (NDF)

    A foreign exchange hedging strategy where the parties agree to settle the profit or loss in a foreign currency futures contract before the expiration date.
  4. 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.
  5. Trading

    5 Popular Derivatives And How They Work

    These popular derivative instruments allow investors to hedge, speculate or increase leverage but weigh the risks before taking exposure.
  6. Investing

    Investing in Crude Oil Futures: The Risks and Rewards

    Learn about the risks and rewards of trading oil futures contracts. Read about a few strategies to limit the risk in trading oil futures contracts.
RELATED FAQS
  1. What is the Difference Between a Forward Rate and a Spot Rate?

    The forward rate is the settlement price of a forward contract, while the spot rate is the settlement price of a spot contract. Read Answer >>
  2. What is the difference between derivatives and options?

    A derivative is a financial contract that gets its value from an underlying asset. Options offer one type of common derivative. Read Answer >>
  3. Why is the initial value of a forward contract set to zero?

    Discover why the initial value of a forward contract is set to zero; read about financial mathematics and exchange logic ... Read Answer >>
  4. How do futures contracts roll over?

    Learn about why futures contracts are often rolled over into forward month contracts prior to expiration, and understand ... Read Answer >>
Hot Definitions
  1. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  2. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  3. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  4. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  5. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  6. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
Trading Center