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Deliverable Grade

Moneyzine Editor
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Moneyzine Editor
2 mins
November 6th, 2024
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Deliverable Grade

Definition

The term deliverable grade refers to the minimum quality of a commodity delivered under a futures contract. The specifications for deliverable grades are critical to the pricing of a contract.

Explanation

Commodities are typically a product of the agriculture and mining industries. Consumers are familiar with agricultural commodities such as corn and wheat as well as energy commodities such as gasoline, electricity, and natural gas. Deliverable grades are the set of standard quality specifications established and maintained by commodity exchanges.

While speculators have little concern with the specification of a commodity, traders that intend on taking delivery, such as hedgers, will purchase commodities of a given deliverable grade. For example, if a fuel oil is used to generate electricity, the grade must conform to the specifications of the electric generating unit that will consume the oil.

Example

The following examples demonstrate the delivery grades under a futures contract for rough rice:

"All futures contracts shall be for U.S. No. 2 or better long grain Rough Rice as the same is established by standards promulgated by the United States Department of Agriculture (U.S.D.A.) at the time of the first day of trading in a particular contract. No heat-damaged kernels as defined by USDA FGIS Interpretive Line Slide 2.0 are permitted in a 500-gram sample. No stained kernels as defined by USDA FGIS Interpretive Line Slide 2.1 are permitted in a 500-gram sample. A maximum of 75 lightly discolored kernels as defined by USDA FGIS Interpretive Line Slide 2.2 are permitted in a 500-gram sample. No other grade is deliverable. To be deliverable, Rough Rice shall have a milling yield of not less than 65%, including not less than 48% head rice. Each percent of head rice over or below 55% shall receive a premium or discount, respectively, from the settlement price for long grain Rough Rice and each percent of broken rice over or below 15% shall receive a premium or discount, respectively."

Related Terms

  • Differential (Futures)
    The term differential refers to the allowed flexibility to change the quality of the underlying asset in a futures contract. Differential allows the seller in a futures contract to deliver the underlying asset which adheres to a predetermined range of quality specifications.
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  • Devaluation (Currency)
    The term devaluation refers to the reduction in the value of a currency relative to the currency of another country. Devaluation typically occurs through an official announcement and the process is a tool governments can use to control monetary policy.
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  • Default (Investing)
    The term default refers to the failure to meet an obligation on a loan or futures contract. Default occurs when a debtor fails to repay the interest and / or principal owed a lender.
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  • Daily Trading Limit
    The term daily trading limit refers to the maximum range a derivative contract is permitted to trade in any one daily session. Daily trading limits are established by the exchange to protect against market manipulation.
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  • Currency Risk (Exchange-Rate Risk)
    The term currency risk refers to the relative change in the valuation of two currencies and the impact it has on return on investment. Both investors as well as businesses that own assets in countries with different currencies are exposed to currency risk.
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  • Credit Derivative
    The term credit derivative refers to an agreement that moves credit risk from one party to the other. Credit derivatives were originally used by participants in the banking industry to diversify the credit risk of customers in their lending portfolio.
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  • Closing Range
    The term closing range refers to the high and low price at which trades occurred at the close of the exchange. The closing range would include both bid and offer prices.
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