The price of a corn futures contract is $2.65 per bushel when the contract is issued, and the commodity spot price is $2.55. When the contract expires, the two prices are identical. What principle is represented by this price behavior?
A) convergence
B) margin
C) basis
D) volatility

Question

Quizplus · Accepted Answer

Convergence refers to the process by which the price of a futures contract approaches the spot price as the contract approaches its expiration date. In this scenario, the futures price of corn and the spot price of corn converge at the expiration of the contract, indicating that the market participants have incorporated all available information into the price of the contract. Therefore, Option A) convergence is the best choice. Option B) margin refers to the amount of funds deposited by a trader to cover potential losses, Option C) basis refers to the difference between the futures price and the spot price of a commodity, and Option D) volatility refers to the degree of fluctuations in price over time.

The Price of a Corn Futures Contract Is $2