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

Question

Quizplus · Accepted Answer

As the expiration of a futures contract draws closer, the futures price tends to approach the spot price of the underlying asset. This phenomenon is known as "convergence," as the two prices should converge at the contract's expiration date. This convergence is due to arbitrage opportunities that exist when the futures price is significantly different from the spot price, which are exploited by traders to make risk-free profits.

What Happens to the Price of a Futures Contract as Expiration