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Convergence

• The movement of the price of a futures contract toward the price of the underlying cash commodity. At the start, the contract price is higher because of the time value. But as the contract nears expiration, the futures price and the cash price converge.

• Is the behavior of a cash commodity or the underlying security instrument and the derivative moving towards one another.

 
 Embedded terms in definition
 Cash commodity
Cash price
Cash
Commodity
Contract
Derivative
Expiration
Futures contract
Futures price
Futures
Security
Time value
Time
Underlying security
Underlying
 
 Referenced Terms
 Bond arbitrage hedge funds: Try to capture interest rate differentials or spreads due to mispricing or better financing than general market participants can attain. Sometimes, there can be a yield pickup due to Convergence between two instruments, a pricing discrepancy due to inefficient evaluations of senior and junior credit risks, or relative value differences.

 Hedge properties: Are features considered necessary for a good risk management position. There are four basic properties, and they are: Economic Validity, Reasonable Correlative Movements, Convergence, and Consistent Basis Behavior.

 Narrowing: Is the movement towards Convergence between the cash and futures market or the cash and forwards market. Here, the price or interest rate differentials are becoming smaller over time between the comparative delivery dates.

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