Question

1. Explain why the establishment of a futures market in a commodity should not have a major impact on prices in the spot market for that commodity.

Answer 1

Future markets of commodity are highly speculative in nature and there is always a physical element of those commodity which is being traded into the market, so the effect of derivative segment of all those commodities are not that important because of existence of a physical market which will, in actual derive the prices of spot market, through actual demand and supply of those commodity so it can be said that existence of a physical market negate the impact of a future market to the largest possible extent in case of a commodity.

it can be exampled through changes in the price of oil in future market when it went into the negative zone but actually in the spot market, the prices of oil didn't go into the negative zone. I can be said that the prices of future markets does not impact the prices of commodity in the spot market, because there is a existence of physical market for derivation of actual price