What Is the Delivery Price?
The delivery price is the price at which one party agrees to deliver the underlying commodity and at which the counter-party agrees to accept delivery. The delivery price is defined in a futures contract traded on a registered exchange or in an over-the-counter forward agreement. The delivery price is set in advance in the contract. It is agreed on the day the futures or forward contract is entered, not on the day in the future when the commodity is actually delivered. Delivery price can also refer to a stock's selling price in options contracts.
Delivery Price Explained
In forward contracts, the forward price and the delivery price are identical when the contract begins, but as time passes, the forward price will fluctuate and the delivery price will remain constant. Also, underlying assets typically are not actually delivered, but rather closed out with offsetting contracts. Another possibility is that a delivery instrument representing the underlying asset, such as a warehouse receipt, will be transferred instead of the actual commodity. If the commodity is physically delivered, the cost of delivery will affect the contract's delivery price.
The concept of the delivery price is an important one because it is set on the day the contract is entered and does not fluctuate for the duration of the contract. Other prices such as the cash price (or spot price) of the commodity or the price to enter or exit a new futures or forward contract do change. Futures contracts are standardized instruments whose gains or losses are marked-to-market daily. Prices are adjusted at the end of each trading day based on the settlement price. The delivery price, however, remains unchanged because it is written into the contract when the contract begins.