KIM FINANCE

Back Month

1. Definition

Back Months (or Far Months / Deferred Months) refer to any futures contracts that expire after the Front Month.

2. Characteristics

  1. Lower Liquidity: Trading volume is generally thinner compared to the front month. This results in wider Bid-Ask spreads and higher slippage risk.
  2. Forward Curve: The prices of back months plot the "Forward Curve," indicating the market's expectation of future prices.
  3. Cost of Carry: In normal markets (Contango), back month prices are higher than the front month because they include the costs of storage, insurance, and financing over the longer period.

3. Usage

  1. Calendar Spreads: Traders speculate on the widening or narrowing of the price gap between the Front Month and Back Month.
  2. Long-term Hedging: Producers and consumers use these contracts to lock in prices for delivery far into the future (e.g., an airline buying fuel for next year).