Which of the following statements is FALSE?

Question

BlackTom AI · Accepted Answer

The prompt provides an incomplete set of answer choices, with only one option visible: "c. The value of a futures contract becomes zero at the end of the day, as futures prices converge towards spot prices as the contract approaches expiry" and an additional token "cross out" that does not appear to be a valid option. Because the options are incomplete, we cannot assess all possible statements, but we can analyze the given statement.

Option presented: "c. The value of a futures contract becomes zero at the end of the day, as futures prices converge towards spot prices as the contract approaches expiry." The underlying concept here is futures pricing and settlement:
- It is true that futures prices tend to converge to the spot price as the contract approaches expiry; this convergence is a fundamental property of futures markets.
- However, saying that the value of a futures contract becomes zero at the end of the day is not accurate in general. Throughout the life of a futures contract, the contract has a mark-to-market value that fluctuates based on changes in the futures price relative to the contract's agreed price. This value is not universally zero at the end of each trading day.
- At expiration, the contract is settled, and any final payoff is determined (which for a long position equals the difference between the spot price at settlement and the contract price, depending on the contract design). After settlement, the contract itself has no remaining value, but this is a specific event at expiration, not a daily occurrence.
- Therefore, the blanket claim that the value becomes zero at the end of the day due to convergence is misleading. The convergence affects the relationship between futures and spot prices, and settlement may render net value zero at expiration, but daily value is not inherently zero just because prices converge.

About the missing options: since the full list of answer options is not provided, we cannot evaluate which statement among them is definitively false beyond analyzing this one option. If there were multiple choices, we would assess each in turn, identifying which is false and explaining why. The provided single option analysis demonstrates the common pitfall of equating price convergence with an always-zero daily contract value.

In summary, the statement as written is not an accurate general description of futures contract value behavior across the contract’s life; convergence refers to price levels near expiry, not to a daily zero value for the contract.

FIN 413 (LEC B01 B02 B03 Winter 2025) Quiz 1

Which of the following statements is FALSE?

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