Deferred Month

What Is a Deferred Month?

In the commodities futures market, the deferred month futures contract is the contract whose expiration date is farthest from now on.

For instance, in the event that a given futures contract has expiration dates in January, February, and March, the deferred month contract would be the one terminating in March.

How Deferred Months Work

The commodities futures markets are a large and important part of the modern financial markets. Through them, companies that depend on commodities for their production processes can source large volumes of commodities at efficient prices. Simultaneously, financial traders can utilize futures contracts to speculate on the price of commodities, and to take part in different activities, for example, risk hedging.

On the off chance that the purchasers need commodities inside a short time period, they can purchase front month futures contracts which terminate in or close to the current month. If anyway they wish to plan farther in advance, they can purchase deferred month contracts that terminate in or close to the most recent month available. Albeit industrial buyers will regularly take physical delivery of the commodities they buy, financial buyers will most frequently settle them for cash without taking physical delivery.

The term "deferred month" is likewise utilized corresponding to options trading. Though futures contracts give the purchaser the right to receive a predefined quantity of commodity at a predetermined time, options give the purchaser the right — yet not the commitment — to purchase a predetermined asset at a set price inside a certain period of time. Regardless, the deferred month contract is essentially the contract whose expiration date is farthest into what's to come. Since new contracts are continually being made, the deferred month contract will change over the long run as old contracts terminate and are supplanted.

Real World Example of a Deferred Month

To outline, consider the case of a trader who wishes to wager that the price of oil will fall from now on. To realize this bet, this trader could sell oil futures contracts, consenting to deliver oil from now on and getting a set price today. In that scenario, the oil trader trusts that, when the delivery date is reached, the price of oil will have declined and they can in this manner purchase the oil all the more economically by buying from the spot market.

To hedge a portion of the risk associated with their investment, they could execute what is known as a futures spread position. This would include selling oil in the close by months' futures contracts while at the same time buying oil in the deferred months' contracts. In doing as such, the purchase of the deferred month futures contracts acts as a hedge, decreasing the investor's possible losses in the event that their prediction of falling oil prices neglects to emerge.

Features

• A deferred month futures contract is unified with a moderately far off expiration date.
• The term is utilized by futures traders while executing futures spreads and comparative transactions.
• Paradoxically, front month contracts are those which lapse somewhat soon.