The term “Delivery Month” refers to the specific month in which the financial instrument or commodity specified in a contract must be delivered to fulfill the terms of that contract.
Definition and Explanation
In financial and commodity markets, a delivery month is a critical concept. It designates the month in which the underlying asset of a futures contract is scheduled for delivery. For instance, in the case of a futures contract, the delivery month is when the seller must deliver the asset to the buyer. Each contract specifies a particular delivery month which is crucial for traders and investors in managing their market positions and expectations.
Importance and Applications
Futures Contracts
Delivery months are fundamental in futures trading. Futures contracts often traded on exchanges like the Chicago Board of Trade (CBOT) or the New York Mercantile Exchange (NYMEX) include a specified delivery month. Traders look at these dates to determine their trading strategies, deciding whether to hold contracts until maturity or to reverse positions.
Commodities
In the commodities market, delivery month indicates when a commodity (e.g., crude oil, gold, wheat) must be delivered. For example, a wheat futures contract with a July delivery month means the wheat must be delivered in July.
Financial Instruments
The concept is also applicable in financial instruments like Treasury Bonds where a particular delivery month will dictate the settlement of the instrument.
Key Considerations
Contract Specifics
Every futures contract outlines the terms of delivery, including timing, location, and procedures – these can vary across different markets and exchanges.
Physical vs. Cash Settlement
Futures contracts can either require physical delivery of the asset or cash settlement. Knowing the delivery month is important regardless, as it influences the asset’s price and market behavior.
Hedging and Speculation
For hedgers, the delivery month is integral to matching the exposure of their positions with their physical operations. Speculators, meanwhile, use this knowledge to predict price movements and make trades accordingly.
Examples
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Crude Oil Futures: A futures contract for crude oil might state that delivery is required in the month of September. Buyers and sellers will anticipate the delivery to occur any day within that specific month.
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Wheat Futures: For a wheat futures contract set for December delivery, the commodity must be delivered within December. This affects how traders manage their inventory and sales.
Historical Context
The concept of the delivery month has origins in agricultural commodity markets where goods like grain needed to be delivered at certain times of the year. This practice helped standardize trading and has since expanded to various futures and financial markets.
Comparisons and Related Terms
- Spot Price: The current market price at which an asset is bought or sold for immediate delivery.
- Contract Month: Similar to delivery month but can be used in different contexts indicating the month a contract is identified for trading purposes.
- Settlements: The process of reconciling purchases and sales, often influenced by the delivery month for futures.
FAQs
What happens if delivery is not made during the delivery month?
Can delivery months be altered once agreed upon?
How does the delivery month affect futures prices?
References
- Chicago Board of Trade. “Understanding Futures Contracts.” CBOT Education.
- Hull, John C. “Options, Futures, and Other Derivatives.” Pearson.
Summary
The delivery month is a cornerstone concept in futures contracts, dictating when an underlying asset must be delivered. It influences trading strategies, market prices, and contractual obligations. Understanding the nuances surrounding the delivery month can aid in better navigating and strategizing for both commodity and financial futures markets.
