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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Introduction to Forwards and Futures

On the expiry day of a stock futures contract, the futures price converges to which of the following?

At expiry the futures price converges to the spot price of the underlying. With no time left, the cost of carry is zero, so any difference would give arbitrageurs a risk-free profit. Hence the final settlement price of the futures equals the closing spot price.

  1. AThe previous day's settlement price
  2. BThe spot price of the underlyingCorrect
  3. CThe risk-free rate adjusted price
  4. DThe next month's futures price

Explanation

At expiry, no time remains for cost of carry, so the futures price equals the spot price of the underlying; this is called convergence. If it did not, arbitrageurs would profit risk-free. The other options are unrelated reference prices.

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