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Answer: Futures prices may vary widely from the spot price of the underlying asset, but the two prices will typically converge as a futures contract approaches maturity.
## Explanation **A is correct** because futures prices and spot prices typically converge as the futures contract approaches maturity. This convergence occurs due to arbitrage opportunities that traders exploit when there are price discrepancies between the futures and spot markets. **B is incorrect** because arbitrageurs primarily ensure convergence during the delivery period, not necessarily throughout the entire life of the contract. Price differences can exist for extended periods before convergence. **C is incorrect** because if the futures price is above the spot price during delivery period, the correct arbitrage strategy would be to sell futures contracts and buy the underlying asset in the spot market (cash-and-carry arbitrage), not the reverse. **D is incorrect** because the S&P 500 futures contract is cash-settled, meaning no physical delivery occurs. The high trading volume is due to its popularity as a hedging and speculative instrument, not because of physical delivery requirements.
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Which of the following is correct regarding futures prices and spot prices?
A
Futures prices may vary widely from the spot price of the underlying asset, but the two prices will typically converge as a futures contract approaches maturity.
B
Arbitrageurs keep the futures price and the underlying spot price close to each other throughout the life of the contract.
C
If the futures price is above the underlying spot price during the delivery period, a trader can profit by buying futures contracts and selling the underlying asset in the spot market.
D
The S&P 500 futures contract has the most trading activity of any futures contract due to its requirement to take physical delivery on the delivery date.