Relationship between Equity Derivative Market and Spot Market

The most popular instruments that allow market participants to manage risks in the modern securities trading are known as derivatives. Derivatives are the contracts that have no intrinsic value, but derive their value from some other asset and such asset is called underlying asset. In the last decade, many emerging economies have started introducing derivative contracts. In India, derivatives trading commenced in June 2000 after SEBI granted final approval to this effect in May, 2000. Financial Derivative products like futures and options in Indian stock market have become important instruments of risk hedging and portfolio diversification.

The present paper is an attempt to study the relationship of index futures market and underlying spot market. Monthly averages of S&P CNX Nifty and Nifty future from April 2000 to March 2013 will be calculated by taking daily closing prices from website of National Stock Exchange. This data will be processed through statistical measures of Correlation and Regression by using SPSS. After that, significance level will be tested by using t-test. Such study is important because introduction of financial futures has increased instability in the spot market. Another reason for examining the relationship is to find out whether futures market plays an important price discovery role in spot market i.e. whether price change in futures market leads to the price change in spot market. The results of the study will be useful for the investors to take their investment decisions.