What Factors Determine Spot Market Prices?
The price discovery mechanism refers specifically to the functions and mechanisms of the futures market that are formed through open auctions and can indicate the future price change trend of the spot market. Forming a price with a foreseeable future spot market and its trend through the open auction is the core content of the futures market price discovery mechanism.
Price discovery mechanism
Right!
- The price discovery mechanism refers specifically to the functions and mechanisms of the futures market that are formed through open auctions and can indicate the future price change trend of the spot market. Forming a price with a foreseeable future spot market and its trend through the open auction is the core content of the futures market price discovery mechanism.
- main application
- In the spot market, the market price is determined by the supply and demand relationship of the spot. This supply and demand relationship is concentrated in the two curves representing supply and demand and the relationship between the two curves. One of them is the supply curve. In the supply curve graph, the horizontal axis represents quantity and the vertical axis represents price. Under normal conditions, its shape is a continuously rising curve from left to right. This is due to the law that the cost of producing a certain product will continue to rise as the output increases. The other is the demand curve. In the demand curve, the horizontal axis represents quantity and the vertical axis represents price. Under normal conditions, its shape is a curve that slopes from the upper left to the lower right.
- This is determined by the law that the utility of the goods to the demander decreases. If the supply curve and the demand curve are plotted in the same graph, the intersection of the two curves is the theoretical market price of the product, which is generally called the equilibrium price. The supply and demand are exactly equal at this point.
- The futures market is basically a market that is completely determined by the laws of supply and demand. In futures trading, many factors affecting the change in supply and demand are concentrated in the trading pool of the exchange, and various factors are converted into a unified transaction price through open competitive bidding. And, as time goes by and other various conditions change, the market transaction price is constantly adjusted. In addition, the stock market in the exchange also reports the market conditions of the same commodity in various parts of the world in a timely manner. This objectively determines the price formed in futures trading, which is a reflection of the current supply and demand relationship in the spot market. It is also a reflection of the future supply and demand relationship that affects the spot market. Therefore, what this price represents is actually the future price of the spot market. Of course, if the market is imperfect and market monopoly factors often play a role, there may be a phenomenon in which the futures price completely deviates from the spot market, however. Sooner or later this deviation will be corrected by the spot market.
- In short, spot markets have been corrected through futures markets. Its trend is based on the premise that the price determination and realization of the two types of markets are basically the same. Without this premise, the price discovery mechanism of the futures market will no longer exist.