The Basis Converges to Zero Over the Life of the Futures

question 3

Multiple Choice

The basis converges to zero over the life of the futures contract because:

• A) futures contracts are more actively traded towards the end of their life
• B) futures contracts are less actively traded towards the end of their life
• C) the spot and futures prices converge at expiry
• D) none of these choices

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Definitions:

Marginal Cost Pricing

A pricing strategy where the price of a good or service is set equal to the marginal cost of producing one more unit, commonly used in regulated utilities.

Regulatory Agency

A government body responsible for creating and enforcing rules to govern a specific industry or sector.

Social Welfare

Policies and programs designed to improve the well-being of individuals and communities, addressing needs such as health, education, and employment.

Natural Monopoly

A market condition where a single firm can provide a product or service at a lower cost than any potential competitor, often due to high fixed or start-up costs.