Thursday, September 29, 2016

finance - Convergence of Spot and Futures prices


Any explanation I've found explaining why future and spot prices converge over time seem to only focus the explanation on why the spot and future price must be equal at maturity.


I understand that if the prices aren't the same at maturity, then an arbitrage opportunity will exist. But what's the explanation for the trend of convergence prior to maturity? I originally thought that this might be because the cost of carry decreases as time to maturity decreases, but doesn't this price behaviour hold true for non-commodity futures as well?


Thanks!





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