What is a Delivery Month?

John Lister
John Lister

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 delivery month may have physical delivery of good scheduled.
A delivery month may have physical delivery of good scheduled.

A futures contract is simply a financial market transaction where the deal is agreed to take place on a future date. This contrasts with the simpler system where the deal is completed immediately, known a spot contract because the deal takes place on the spot. Usually with a futures contract, the price is agreed upon up front and will hold regardless of what the prevailing market price is when the deal comes to completion.

With some types of futures contracts, the delivery month will literally involve delivery. For example, with a commodities contract, the seller will deliver the agreed quantity of the commodity, such as grain, in the agreed month, while the buyer will hand over the money. The contract may involve a delivery that is real but comes in electronic form. For example, with a currency futures contract, the two sets of money are usually delivered by electronic transfer rather than as physical cash.

With other types of futures contracts, the delivery month simply involves a calculation. This comes with deals that use a nominal amount. For example, some deals might involve both sides lending each other a set amount, one charging an agreed fixed rate and the other charging the market rate in the delivery month. With such deals, the capital of the loan never changes hands and, come the delivery month, the two sides don't pay the full interest payments. Instead, they calculate how much either side's interest payments would have been and then one side pays the other to make up the difference, representing the profit and loss on the deal.

Exactly when in the delivery month the deal is completed depends on the individual contract. In many financial exchanges, there is a standardized date in each month for deliveries on a particular type of contract to take place. Where this is the case, any variation must be specifically agreed upon in advance by both parties.

Some contracts may be labeled as front month contracts. This means the completion date is the earliest possible date after the deal is agreed. This will either be the same calendar month or the following calendar month, depending on whether the standard completion date has already passed in the current calendar month. Although the potential profit tends to drop as the completion date approaches, because there are less likely to be unpredictable variations in the market rate, trading in front month contracts can be particularly liquid. This is because many traders are only interested in making profits by buying and selling futures contracts and have no desire to be involved in the exchange at the end, particularly with physical commodities.

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    • A delivery month may have physical delivery of good scheduled.
      By: iceteastock
      A delivery month may have physical delivery of good scheduled.