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Futures: Convergence of Spot and Futures Prices at Expiration

CFA® Exam, CFA® Exam Level 2, Derivatives

This lesson is part 9 of 15 in the course Derivatives Part 1

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.
Previous Lesson

‹ Introduction to Futures Contracts

Next Lesson

Futures Prices vs. Forward Prices ›

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In this Course

  • 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

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