Futures: Convergence of Spot and Futures Prices at Expiration
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Given that futures contracts are standardized modifications on forward contracts, the same pricing formula and arbitrage relationship applied.
Futures Price: f0(T) = [S0 - PV(CF)](1+r)T
Futures Price (alternative formula): f0(T) = S0(1+r)T - FV(CF)
A lower case "f" notation distinguishes futures from forwards ("F").
- At the expiration of a futures contract, the futures contract price must equal the spot price of the underlying; if this is not the case then an arbitrage opportunity exists.
- If the futures contract is less than the spot price of the underlying at expiration, then a trader can buy the future and sell the spot.
- If the futures contract is greater than the spot price of the underlying at expiration, then a trader can buy the spot and sell the futures contract.