Price Discovery in Indian Spot and Future markets of Gold and Silver

Last twenty years have exposed the corporate world to many financial risks due to policy of liberalization and globalization policy across the world. In today"s dynamic business environment risk management has become very critical for the survival of MNCs. Therefore the emergence of derivative markets in India is attributed to the need of effective and less costly risk management tools for predicting the price of underlying assets. To reduce the extent of financial risks by providing commitment of price of an asset at future date is the basic feature of these financial instruments which had made them popular in the recent times. Commodity future trading was permitted in 2003 after which commodity derivatives market in India has witnessed a phenomenal growth. The functioning of future market came under scrutiny during 2008-2009 due to price rise and the role of futures market in stabilizing spot prices was widely discussed and studied. Some studies reveal that the future trading in commodities give rise to inflation in the market while other do not suggests any such linkages. This study analyses the market behavior and price discovery in Indian Commodity Markets and factors affecting it. The study considered average daily spot and future prices of Gold and Silver from 2006 to 2012. ADF test, Johansen Co-integration Test and VEC Granger causality test has been used to test the price discovery i.e., the effect of future market on spot market and vice-versa. This will help in identifying the hedging opportunities in the volatile market. The research field taken for the study is Indian Commodity Market.