Convergence

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Definition:


Normally, the contract price of a futures contract is higher than the current price of the underlying asset (normally a commodity). The futures contract price is higher because of the effect of the time value of money. As the expiration date nears, the spread between the spot price and the futures contracts price becomes smaller and smaller. On the delivery date of the contract, the futures and spot prices should be equal.

This process of futures and spot prices approaching one another is called convergence.

"Give a man a fish and he will eat for the day. Teach a man to fish and he will eat for a lifetime."
Chinese Proverb
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