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Delivery Point

Delivery Point
TradingFutures Commodities TradingFutures and Commodities Trading

What Is a Delivery Point?

The delivery point, in futures contracts or different derivatives, is the location where the physical commodity underlying the contract will be delivered. The futures contract buyers who keep up with their position must be ready to acknowledge the delivery and pay the settled upon price for the physical commodity. In any case, the delivery point applies just to future contracts that specify the physical delivery of the asset. Contracts that are cash-settled don't participate in physical delivery.

Understanding Delivery Points

The delivery point is a fundamental element recorded as a hard copy futures contracts. The picked delivery point will influence the net delivery price or cost of the underlying asset. The terms of the delivery guarantee the value of the goods delivered. With physical delivery, the price of commodities contrasts by location due to the costs of shipping them from their source to the delivery point. In this manner, to determine a single price of a commodity for contract purposes, the delivery point is an essential detail.

The majority of futures market participants trade speculatively, and most don't consider taking delivery of the physical commodities in futures contracts. These speculative buyers purchase futures contracts since they accept the price of the underlying commodity will rise, not on the grounds that they're keen on taking delivery of several thousand barrels of oil or several thousand heads of dairy cattle. Taking delivery requires having the resources to store and market these resources to potential end buyers.

Buyers of futures contracts who wish to receive the physical commodity are habitually expecting to lock in a price on the commodity they use in production. By buying a futures contract, they hope to reduce the risk of adverse price developments in an asset.

Instances of Delivery Points

The delivery point is most frequently a critical transportation hub for the commodity executed. The change in prices due to the delivery point is promptly recognizable in gasoline prices. In the event that you go on a road trip between urban communities, you will most frequently notice steady changes in the average price of gasoline. Prices are lowest around bigger oil refining centers.

  • The delivery point for most natural gas and liquefied natural gas (LNG) New York Mercantile Exchange (NYMEX) executed futures is the Henry Hub, a natural gas pipeline situated in Erath, Louisiana.
  • Corn and soybean futures executed by the Chicago Board of Trade (CBOT) is to terminals on a 204-mile section of the Illinois River
  • Live cows and hoards show up at different domesticated animals yards and slaughterhouses isolated among five districts or regions
  • West Texas Intermediate (WTI) crude oil futures exchanged on the NYMEX and have a delivery point at the Cushing Hub in Oklahoma

Special Considerations

At the point when delivery happens, a warrant or bearer receipt — which addresses a predetermined quantity and quality of a commodity in a specific location — changes hands from the seller to the buyer. Full value payment then, at that point, happens. The buyer has the option to eliminate the commodity from the warehouse. Frequently, a purchaser will leave the product at the storage location and pay a periodic storage fee. Exchanges additionally set fees for some parts of the delivery interaction.

It is significant to select the commodity delivery point carefully. Domestic locations might introduce a set of legal, tax, and regulatory requirements that vary decisively from those incurred by setting a foreign location as the delivery point. These differences can be sufficiently critical to make a given deal unreasonable or even inconceivable.

Features

  • Futures contracts will determine a normalized commodity to be delivered at a specific delivery point (or points on the off chance that various geographic regions exist).
  • A delivery point is a settled upon location where the underlying asset connected with an expired derivatives contract is physically delivered from the short to the long.
  • Contingent upon the commodity to be delivered, storage and delivery costs will fluctuate and be reflected in the price of the derivatives contract.