What does Allowances in Futures mean?
Allowances are a premium or discount to the standards outlined in a futures contract. In futures contract, the physical commodity of the required specifications (basis grade) are required to be delivered as per the terms of contract. But in practice it may be difficult to exactly match the specifications. Some deviation from the basis grade is allowable on a premium or discount when delivering commodities under the terms of a futures contract.
Futures Knowledge Explains Allowances in Futures
In future contracts, allowances are permissible deviation from standard quality of commodities on delivery. This is expressed as premium or discount. For example, in Brent Crude Oil future contracts, there is always a chance of variation in chemical properties such as density, sulphur and water contents. The supplies are accepted by providing allowances.