A spot or physicals price is the price at which one can currently buy or sell a commodity for immediate delivery.  A futures price is the price of a commodity specified in a contract either for purchase or sale for delivery some time in the future.  The relationship between the two prices derives from the fact that the futures market offers a means of risk transfer from hedgers to speculators, from the usefulness of a futures price as a reference for pricing cash markets and from the way a futures price is determined by condition of supply and demand in the cash market.  In general, the two prices are parallel with one another because they are both influenced by the same factors and converge as each delivery month expires because of arbitration between the two markets and declining carrying charges. 

Currently there are three international futures markets namely, Singapore Commodity Exchange (SICOM), Tokyo Commodity Exchange (TOCOM) and Osaka Mercantile Exchange (OME).  In addition there are NR futures currently trading domestically in China, India and Thailand.  The basic function of a futures market is competitive price discovery.  Price determination in futures markets is close to market competition.  It reflects the views of a large number of buyers and sellers on supply and demand in the physical as well as the futures market.  Futures prices are often used as a reference price for physical trading and futures contracts can be used to facilitate physical trade directly.  Futures markets permit risk shifting because they provide facilities for hedging for risk aversion.  Futures markets can also be a useful contribution to price stabilisation through speculation and hedging.  The weakness of futures markets are the possible crash caused by a sharp rise in speculation. 

Monthly Kuala Lumpur physical price and TOCOM futures price, Jan’90-Feb’08