What Is “Convergence” in Futures Pricing and Why Is It Important for Hedging?

Convergence is the tendency for the futures price and the spot price of the underlying asset to become equal as the futures contract approaches its expiration date. This occurs because, at expiration, the futures contract becomes an obligation to buy or sell the asset immediately at the spot price.

Convergence is crucial for a successful hedge, as it ensures the gain or loss on the futures position offsets the loss or gain on the spot position.