Quick Answer
Physical delivery moves a document of title, a warehouse receipt or shipping certificate, not the raw commodity across a floor. The assigned long receives that instrument and can then take the goods from an exchange-approved facility. Cash-settled contracts, like stock-index and rate futures, have no physical delivery and no warehouse receipt.
When a contract does go to delivery, what actually changes hands is a piece of paper (or an electronic entitlement) that stands for the goods. The exam trap is putting a physical delivery instrument on a contract that is really cash-settled.
Physical Delivery via a Delivery Instrument
Delivery on a physically-settled contract happens through a document, not a truck at the trading floor.
- Delivery: the tender and receipt of the actual commodity, its cash value, or a delivery instrument covering the commodity, used to settle a futures contract.
- A document of title changes hands: for a physically-settled contract, the seller does not hand over a truckload of grain on the floor. Delivery is made by transferring a document of title.
Warehouse Receipts and Shipping Certificates
Two instruments do the delivery work, and they differ in what exactly they represent.
- Warehouse receipt: a document issued by an exchange-approved warehouse or depository evidencing title to a stated quantity and grade of the commodity at an approved location. It is the transferable delivery instrument for many storable commodities.
- Shipping certificate: a related instrument issued by an approved facility representing a commitment to deliver the commodity to the holder on demand. It is used where a warehouse receipt does not fit.
- Where the long ends up: the assigned long receives the warehouse receipt (or shipping certificate) and can then take, or arrange load-out of, the physical commodity from the approved facility. Only exchange-approved facilities may register and deliver against the contract.
| Instrument | What it represents |
|---|---|
| Warehouse receipt | Title to a specific quantity and grade of the commodity sitting in an approved warehouse |
| Shipping certificate | A commitment by an approved facility to deliver the commodity to the holder on demand |
Physical Delivery vs Cash Settlement
Not every futures contract can be delivered, and the difference decides whether a delivery instrument exists at all.
| Feature | Physical delivery | Cash settlement |
|---|---|---|
| What changes hands | The actual commodity, via a warehouse receipt or shipping certificate (a document of title) | Only cash; no commodity moves |
| How it settles | Short delivers the instrument, long pays the invoice amount and takes title | Position settles to the final settlement price; the difference is paid or received in cash |
| Typical products | Storable, physical commodities: grains, metals, energy | Many financial futures: stock-index futures and short-term rate futures |
- Cash-settled contracts have no delivery instrument: contracts such as stock-index futures and Secured Overnight Financing Rate (SOFR) futures settle to a final cash mark at the settlement price. No commodity moves and no warehouse receipt exists.
Think of it this way: you cannot warehouse a stock index or an interest rate; there is nothing to store or load out. So those contracts just settle up in cash at the final price, and no document of title is ever created.
Exam Tip: Gotchas
- Physical delivery moves a document of title, not the commodity across the trading floor. The warehouse receipt or shipping certificate is what changes hands, and it applies only to physically-settled commodities.
- Cash-settled contracts have no warehouse receipt. If a question puts a "warehouse receipt" on a stock-index or interest-rate future, that is the trap. Those contracts have no physical delivery and settle only in cash.