Meaning of Delivery Price
It is the price at which a party agrees to supply the underlying goods and at which a counterparty agrees to approve the delivery. The delivery price is specified in a futures contract traded on a registered exchange or an over-the-counter forward agreement. The delivery price shall be fixed in advance in the contract.
It shall be agreed on the day on which the futures or forward contracts are entered, not on the day on which the goods are actually delivered. Delivery price can also refer to the selling price of a stock in an option contract.
Understanding Delivery Price in Detail
For forward contracts, the forward price, as well as the delivery price, is the same as when the contract starts. But when time passes, the forward price will fluctuate, and the delivery price will remain constant. Additionally, the underlying properties are usually not directly delivered, but instead closed with offsetting contracts.
Another option is that the distribution instrument representing the underlying asset, such as the receipt of the warehouse, would be transferred instead of the actual item. If the goods are physically shipped, the cost of shipping would have an effect on the purchase price of the contract.
Importance of Delivery Price
The delivery price concept is relevant as it is set on the date on which the contract is entered into and does not fluctuate for the duration of the contract. Certain rates, such as the cash price (or spot price) of a commodity or the price to enter into or exit new futures or forward contracts, are subject to adjustment.
Future contracts are standardised instruments whose gains or losses are marked on the market on a daily basis. Prices are altered at the end of each trading day on the basis of the settlement price. However, the delivery price remains unchanged because it is written into the contract at the start of the contract.
