How Does Physical Settlement Influence the Convergence of Spot and Futures Prices at Expiration?

Physical settlement enforces a very strong convergence. As the contract approaches expiration, the futures price must converge with the spot price because any deviation would create an immediate, large, and risk-free arbitrage opportunity.

If the futures price is higher than the spot price, an arbitrageur can buy spot, sell futures, and deliver the spot asset for a guaranteed profit. This delivery mechanism is the ultimate force driving convergence.