Deliverable Grades

The deliverable grade specifies the minimum quality of the commodity that is to be delivered under a contract. Carefully specifying the deliverable grade ensures that both parties to the contract agree on precisely what is to be delivered, allowing the contract to be priced correctly. For any given commodity, there are many different grade and types.

For example, oil comes in many different qualities, with much different prices for each grade. If a minimum deliverable grade is poorly specified, the deliverer can profit at the expense of the acquirer by delivering a cheaper, lower quality grade than was anticipated by the contract price.

In the futures market, firms often wish to hedge their risk to changing prices by entering contracts to buy certain commodities in advance. For example, suppose an airline wishes to hedge its risk to changes in future jet fuel prices. The airline could enter into a contract to buy a certain quantity of jet fuel, and have it delivered in the future. There are many different types of jet fuel, each with different prices, so such a contract would specify the minimum grade of fuel to be delivered. If a minimum deliverable grade is not specified, the deliverer would invariably deliver the cheapest fuel. In this situation, the airline might have overpaid considerably and it might receive jet fuel unsuitable for its purposes.