Physical delivery in futures contracts means the actual transfer of the underlying asset from the seller to the buyer when the contract expires. This ensures that the buyer receives the real commodity or asset agreed upon, not just cash. Physical delivery is important for those who want the actual goods, like farmers, manufacturers, or traders in commodities.

What Is Physical Delivery in Futures Contracts?

Physical delivery means that when a futures contract expires, the actual asset like gold, crude oil, or agricultural products is delivered to the buyer. The seller must provide the agreed quantity and quality of the asset as per the contract terms.

Why Is Physical Delivery Important?

Physical delivery is important because it ensures that futures contracts serve their purpose beyond just price speculation. It helps producers and consumers of commodities manage risk by guaranteeing the availability or sale of the actual product at a future date.

Who Uses Physical Delivery in Futures?

Physical delivery is mainly used by businesses like farmers, manufacturers, exporters, and importers who need the actual goods for their operations. Traders who want to take ownership of commodities also use physical delivery to get the asset instead of settling in cash.

How Does Physical Delivery Affect Futures Prices?

The possibility of physical delivery affects futures prices by linking them to the actual supply and demand of the commodity. When contracts near expiry, prices usually move closer to the spot market price because the actual asset must be delivered, reducing price gaps between futures and spot prices.

Can Traders Avoid Physical Delivery?

Yes, most traders avoid physical delivery by closing or rolling over their contracts before expiry. This way, they settle in cash without taking or giving the actual asset. This is common among speculators who want to profit from price changes, not the commodity itself.

How Is Physical Delivery Processed?

When a contract expires with physical delivery, the seller arranges to deliver the asset to a designated warehouse or location specified by the exchange. The buyer then takes possession of the asset. The exchange oversees this process to ensure fairness and proper delivery.