futures prices vs. expected future spot prices

I’m just finishing the second mock exam included with the level two cirriculum. Morning session, block 7, question 6. Here is the relevent vignette and question/answer:

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I guess I thought I had a handle on this but … I thought that futures prices were not tied to expected future spot prices directly. Don’t we use CURRENT spot prices and then appropriate adjustments to account for time value of money and for carrying costs and convenience yields? Both buyer and seller of a future takes on risks so why would future prices be adjusted for a risk premium? … If futures prices are discounted for a risk premium, couldn’t one go short the asset and long the future to capture the “risk premium” without actually taking any risk? (Since they have already secured a price to buy back the asset to cover the short).

Expected spot prices, simpily stated, is the price at which you expect your future’s price to expire at. Therefore a future’s contract today is worth the expected spot price (at, lets say, t = 90 days), less a premium for not having to hold the product yourself.

Said differently, your future’s price today will converge to the expected spot price in the future. The difference between the two is a risk premium for holding the paper contract in place of the actual product. If you hold the product, there’s risk it’s destroyed, lost, stolen etc

At least this is how I have come to understand the ‘expected’ spot price peice of a future’s contract