As time draws closer to contract expiration,futures 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 time draws closer to contract expiration, futures prices are expected to converge upon the spot price. This is because the delivery date is approaching and the futures contract must eventually be settled with the physical commodity or cash equivalent, which is essentially the spot price. This convergence is known as the "cash and carry" relationship and is part of the pricing mechanism for futures contracts. The other choices are not necessarily accurate as the demand for delivery and speculators' actions may not be the only factors affecting futures prices, and futures prices may not always move similarly to broad-based market indices.

As Time Draws Closer to Contract Expiration,futures Prices Can Be