I am confused with the concept of Futures Prices converging with Spot prices near maturity. Here’s my confusion:
- Are they talking about the Price of the Futures contract itself, or the price stated within the contract that is fixed and will be acted upon in maturity?
My confusion derives from my book’s statement: “If the futures price is greater than the spot price during the delivery period, an arbitrageur buys the asset, shorts a futures contract, and makes delivery for an immediate profit”
- This makes little sense to me because the price stated within the contract is the delivery price, not the price of the future contract itself.
Here’s an example I am trying to use to help me understand: Imagine today you enter a futures contract for $80 on AAPL share in two months time. A day before the contract expires, the price of the futures contract is now $89 and the Spot price of AAPL share is $85.
- So how would I make profit here if these two prices did not converge by maturity?
- According to my book (my interpretation not theirs) I would buy the AAPL share for $89, go short on the contract, sell the share for $80? Do I sell at the price stated in the contract $80 or the $89? Is the new comitted price $89 or $80?
- Can someone be kind enough to set up a short example so I can clear the confusion in my head? I’d really appreciate it!