NISM Series XVI - Commodity Derivatives Exam Notes
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F = S + C where: F: Futures Price S: Spot Price C: Cost of carry
The cost of carry diminishes with each passing day and the differential between spot and futures prices must narrow and on the date of delivery, it becomes zero and the spot and futures price converge. This is known as convergence.
Fair Value of the Futures Contract = Spot Price + Cost of Carry
In case of annual compounding, fair value of a futures contract can be calculated as:
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