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A delivery month is the month in which a futures contract is completed, either through physical delivery of goods or cash settlement. Futures contracts involve agreements to complete a deal at a future date, with prices agreed upon in advance. Delivery may involve actual delivery or simply a calculation, depending on the type of contract. The timing of the agreement’s completion depends on the individual contract, with some contracts labeled as first month contracts. Trading in first-month contracts can be particularly liquid.
The delivery month is the month in which a futures contract will be completed. In some cases, this will mean the physical delivery of goods. In others, it will be the point at which a cash settlement is calculated and completed.
A futures contract is simply a financial market transaction where it is agreed that the deal will take place at a future date. This is in contrast to the simpler system where the deal is completed immediately, known as a spot contract because the deal is done on the spot. Typically, with a futures contract, the price is agreed upon in advance and will be maintained regardless of what the prevailing market price is when the agreement is completed.
With some types of futures contracts, the delivery month will literally imply delivery. For example, with a commodity contract, the seller will deliver the agreed quantity of the commodity, such as grain, in the agreed month, while the buyer will deliver the money. The contract may involve a delivery that is actual but comes in electronic form. For example, with a currency futures contract, the two sets of money are typically delivered via electronic transfer rather than physical cash.
With other types of futures contracts, the delivery month is simply a calculation. This comes with offers that use a nominal amount. For example, some agreements may involve both parties lending to each other a fixed amount, one charging an agreed fixed rate and the other charging the market rate in the month of delivery. With such agreements, the principal of the loan never changes hands, and when the installment month arrives, the two parties do not pay the full interest payments. Instead, they calculate how much each party’s interest payments would have been, and then one party pays the other to make up the difference, representing the gains and losses on the deal.
Exactly when in the delivery month the agreement is completed depends on the individual contract. On many financial exchanges, there is a standardized date in each month for deliveries of a particular type of contract to take place. In this case, any variation must be specifically agreed in advance by both parties.
Some contracts may be labeled as first month contracts. This means that the end date is the earliest possible date after agreeing to the agreement. It will be the same calendar month or the next calendar month, depending on whether the standard end date has already passed in the current calendar month. Although the potential gain tends to decrease as the expiration date approaches, because unpredictable movements in the market rate are less likely, trading in first-month contracts can be particularly liquid. This is because many traders are only interested in making a profit by buying and selling futures contracts and do not want to participate in the trade at the end, particularly with physical products.
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