Register / Login

Futures: Convergence of Spot and Futures Prices at Expiration

Premium

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.

Unlock Premium Content

Upgrade your account to access the full article, downloads, and exercises.

You'll get access to:

Access complete tutorials and examples
Download source code and resources
Follow along with practical exercises
Get in-depth explanations

Previous Lesson

Introduction to Futures Contracts

Futures Prices vs. Forward Prices

Derivatives Part 1

15 lessons

CFA Level 2: Derivatives Part 1 – Introduction

What are Forward Contracts?

Equity Forward Contracts

Fixed Income Forward Contracts

Currency Forward Contracts

Forward Rate Agreements (FRA)

Credit Risk and Forward Contracts

Introduction to Futures Contracts

Futures: Convergence of Spot and Futures Prices at Expiration

Futures Prices vs. Forward Prices

Contago and Backwardation

Pricing Stock Index Futures

Pricing Interest Rate/Treasury Bond Futures

Pricing Currency Futures

Eurodollar Futures

Topics

Related Groups

Finance Concepts