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What is a Physical Delivery?

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  • Written By: H. Bliss
  • Edited By: W. Everett
  • Last Modified Date: 14 September 2016
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    Conjecture Corporation
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Physical delivery essentially means the delivery of goods to a contracted buyer. In a financial contract, physical delivery is a term for the contract specification that a financial asset be delivered on a specific delivery date. This term is usually used in investment, most often while trading options or futures. Many options and futures contracts do not reach physical delivery because the asset is traded away before the financial contract matures. Physical delivery only happens when the contract is carried to its delivery date and the original financial assets are delivered to the original buyer specified in the contract.

An option is a contract that gives the buyer the ability to either buy or sell an asset at an agreed-upon price for physical delivery to occur on a specified delivery date. Options differ from futures because the buyer is given an option as to whether to complete the transaction. Futures are contracts that bind a buyer or seller to complete the contract on a contracted delivery date. The delivery date is is the agreed-upon time of physical delivery, when the assets indicated in the contract are released to the buyer.

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Investing in futures is a means of speculating on the future value of an asset. If an investor believes that an asset will be worth more in a few months, the investor can buy futures in that asset. If the asset becomes more valuable over the time the futures contract matures, the investor will turn a profit.

When the assets of a futures or options contract are traded away or negated before the contract matures, this is called "offsetting." This can happen when the buyer of a financial contract sells the asset from the contract before the delivery date specified on the contract. If a futures contract has been offset, there is no physical delivery of the assets on the delivery date. Many investors use offsetting to liquidate their investments quickly in order to invest in a more lucrative prospect.

In finance, an asset is a financial instrument that has an agreed-upon value based on a contract. Assets, as defined in finance, include many types of financial instruments, most notably stocks, bonds and mutual funds. Financial assets have no inherent value and are given value due to an agreement between the buyer and seller. Outside of finance, an asset can include anything of any economic value to the owner.

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