Spot and Futures Prices Relationship in the Indian Commodity Market

What is it about?

This paper looks at how spot (current) prices and futures (future contract) prices of commodities in the Indian market are related from 2009 to 2020. Using a method called ARDL bounds testing, the study finds a long-term connection between these two types of prices for commodities like aluminum, copper, crude oil, gold, nickel, and silver, as well as for indices like agricultural, livestock, and precious metals. The analysis shows that, over the long term, changes in current prices influence future contract prices for aluminum and copper. Additionally, in the short term, there are both one-way and two-way influences between current and future prices for aluminum, copper, gold, and silver.

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Photo by Maxim Hopman on Unsplash

Photo by Maxim Hopman on Unsplash

Why is it important?

This research holds importance because it delves into the relationship between spot (current) and futures (future contract) prices of commodities in the Indian market. Understanding this relationship is crucial for investors, traders, and policymakers involved in the commodity market. The study employs advanced statistical techniques to reveal long-term connections and causality between these prices for various commodities and indices. The findings contribute valuable insights into how changes in current prices may impact future contract prices over time. This information is particularly relevant for decision-makers in the commodities market, helping them make informed choices about buying, selling, and managing risks. The research provides a nuanced understanding of the dynamics between spot and futures prices, enhancing comprehension and strategic decision-making in the Indian commodity market.