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FRM Part I · FRM Exam Part I · Introduction to Derivatives

Which statement best describes how convergence works in a futures contract as the delivery period approaches?

The futures price converges to the spot price of the underlying asset as delivery nears. If the two differed at expiry, arbitrageurs could buy in the cheaper market and sell in the dearer one for a riskless profit, which forces the prices together.

  1. AThe futures price converges to the spot price of the underlying assetCorrect
  2. BThe spot price converges to the initial futures price at inception
  3. CThe futures price converges to the margin level required by the exchange
  4. DThe futures price converges to the risk-free rate times the spot price

Explanation

As delivery approaches, arbitrage forces the futures price to equal the spot price of the underlying at expiry. Otherwise, traders could buy cheap and sell dear, locking in a risk-free profit. The other options describe unrelated quantities.

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