As time draws closer to contract expiration, futures contract prices can be expected to:
A)Increase as the demand for delivery intensifies
B)Decrease as speculators resolve the uncertainty of prices
C)Move similarly to broad-based market indices, such as the S&P 500
D)Converge upon the spot price

Question

Quizplus · Accepted Answer

As the expiration date of a futures contract approaches, the price of the contract will generally converge upon the spot price of the underlying asset. This is because the futures price should theoretically reflect the expected future spot price, and as the expiration date approaches, the uncertainty around that future spot price decreases. Therefore, the futures contract price and the spot price should converge. The other answer choices (A, B, and C) are not necessarily true or reliable indicators of how futures contract prices will behave as expiration approaches.

As Time Draws Closer to Contract Expiration, Futures Contract Prices