What happens to the price of a futures contract as expiration draws closer?
A) It exceeds the spot price of the asset.
B) It is exceeded by the spot price of the asset.
C) It approaches the spot price of the asset.
D) There is no relationship between futures price and spot price as the contract approaches expiration.

Question

Quizplus · Accepted Answer

As expiration draws closer, the price of a futures contract approaches the spot price of the underlying asset. This is known as convergence. This happens because, as the expiration date approaches, the futures price and spot price become increasingly similar because there is less time for any differences to exist, and arbitrageurs buy or sell futures or the underlying asset to profit from the difference.

What Happens to the Price of a Futures Contract as Expiration