Relationship of Futures and Spot Prices in the Indian Derivative Market- a Study

Abstract

The changing nature of financial industry, especially as reflected in the developments in the financial derivatives market, provides considerable opportunities for risk sharing or inters temporal smothering. Derivatives can complement the traditional methods of matching asset and liability to minimise the interest rate risk. Though, the pricing of derivatives, based on arbitrage and required conditions in financial markets which may not be met in fact, is a complex and extremely useful in pricing the risk of insurance against bad finandaJ outcomes and pricing complex cash Dows aaociated with a variety of financial instruments. The temporal relationship among stock and futures markets has been and continues to be of intense interest to researchers, regulators, rmancial analysts and practitioners. The root cause for examining this relationship is that in perfect efficiently and ideally organized futures and stock markets, informed investors are indifferent among trading in either market, as the new information disseminates in both markets at the same time. That means that changes in the logarithm of futures and stock price (futures and spot returns) would be estimated to be perfectly contemporaneous correlated and non cross-auto correlated.