How Does a Physically-Settled Futures Contract Create a Delivery Obligation?

A physically-settled contract specifies a grade, quantity, and location for the underlying asset. If the contract is held until expiration, the short position (seller) incurs the obligation to deliver the asset, and the long position (buyer) incurs the obligation to accept delivery and pay the final contract price.

This is typically managed through an exchange-approved delivery mechanism, often involving a warehouse receipt or similar document.