Explain the Concept of “Convergence” in Futures Pricing

Convergence is the tendency for the futures price to gradually align with the spot price of the underlying asset as the contract approaches its expiration date. At the moment of expiration, the futures price and the spot price must be equal, otherwise an arbitrage opportunity would exist.

This alignment ensures that the futures contract fulfills its role as a pricing and hedging tool. Lack of convergence is a sign of a dysfunctional market.