What are Back Months?

John Lister

Back months are used in futures contracts, which are agreements to complete a financial transaction on a set date in the future. The next month in which futures contracts of a particular type will come due is known as the front month. All months after this are known as back months. The term can refer to the calendar month or the contracts themselves.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

A futures contract is simply an agreed deal that will be completed on a set date in the future rather than immediately. The deal can involve commodities, financial securities, or foreign currencies, among other assets. The price is agreed at the start of the deal, meaning it will likely differ from the prevailing market price when the deal comes due for completion. Many people who invest in futures contracts do so in the hope of exploiting the difference between the deal price and the market price on the completion date, for example buying a commodity and then immediately selling it at a profit. Some holders of a futures contract will sell it to another investor before it comes due, making the contract a tradeable asset itself.

Most financial exchanges that deal in futures contracts will have set dates on which contracts will expire. For example, an exchange might deal in futures contracts that can come due in January, April, July, or October. The relevant month for a particular contract is known as the delivery month because it is the month in which one party must deliver the agreed asset. This stems from futures contracts originally being mainly in the area of commodities trading, meaning the "selling" party would physically deliver goods. The terminology is still used in other types of futures contracts, where the asset is intangible, such as a stock or foreign currency.

On any particular day, the contract in a particular category that is due to expire next is known as the forward month. In the January/April/July/October example, in March the forward month would be the one scheduled for completion in April. In April, which was the forward month would depend on precisely which day of the month contracts came due on the relevant exchange. The forward month is also known as the spot contract, and it is the current market price for this contract that is listed on an exchange as the spot price.

All contracts other than the forward month are known as back months. Such contracts are also referred to as deferred futures or deferred months. Comparing the current market price of forward months and back months that are identical, except for the expiration date can give insight into how the market expects the market price of the underlying asset to change over time.

Readers Also Love

Discuss this Article

Post your comments
Forgot password?