How Does a Lack of Convergence at Expiration Indicate High Basis Risk?

A lack of convergence means that the futures price and the spot price remain significantly different on the expiration date. Since the fundamental principle of futures is that the prices must converge at expiration, a failure to do so indicates that there is a major market inefficiency, a logistical bottleneck, or a flaw in the reference rate, all of which represent high, unhedged basis risk.