Question

- The stock market has swung wildly due to fears of economic damage caused by the Covid-19 outbreak. On March 5, 2020, an article in the Wall Street Journal observed that "futures linked to the Dow Jones Industrial Average fell 1.8%, suggesting that the gauge for blue-chip stocks may open over 500 points lower when trading opens in New York”. Why might falling futures be an indication that DJIA might fall after market opens? Use what we have learned about futures price and spot price to explain.

Answer 1

Futures prices are an indication for spot prices. Futures prices highly involves speculation in derivative markets and they continue to trade even after the spot market is closed.

Spot market is a market where prices are decided in the basis of cash market transactions but in Futures market prices is of derivatives nature.

Future Markets either trades at a discount or premium in respect to cash market and is an indication of where the people are speculating the price to go in incoming time.

In relation to DJIA futures, it keeps on trading even after the spot market is closed and rates of the DJIA futures are determined on the performance on World Markets and then the prices of the DJIA futures are realigned with the spot Markets when US markets opens .