convergence investment & finance definition

The degree to which the price in a futures or forward market moves toward, or converges, with prices in the cash market as the expiration date approaches. Generally, if convergence is reached at expiration, then that market is likely to be more liquid and easily traded. A trader can be fairly certain that a stock index contract closely matches the cash settlement value of the actual stocks, so it serves as a good hedge. If convergence is less definite, then the pricing relationships between the futures contract and the cash product are less defined and may pose problems for traders or arbitrageurs who want to use the financial instruments to hedge their risk.