ABSTRACT
This chapter investigates the various price relationships and examines the difference between the current spot and futures prices. It details the difference between the current prices of two futures contracts and explores the relationship between the current futures price and the expected spot price at delivery (the risk premium). The convergence of the basis to zero at maturity implies that changes in the basis tend to exhibit positive first order autocorrelation. There have been a number of investigations of the order of integration of spot and futures prices for stock indices and, given they have the same order of integration, whether they are cointegrated. The creation of a futures market will attract investors to trade the future who did not already trade the spot. The spot price reveals only part of the information possessed by informed traders because the spot price is also influenced by random disturbances.
