Impact of Currency Futures on Spot Market Volatility in Indian Foreign Exchange Market

Abstract

This work is an endeavor to explore the relationship of Lag between future & underlying market, ie. Spot in foreign exchange market of India. Only the USD/INR exchange rate is considered for the study for the presented work. This study is comprised of both analytical and empirical. The daily exchange rates of US Dollar and Indian Rupee (INR) were collected over some time from 30th January 2015 up to 23rd November 2020. The presented study has been worked out in four phases. First is to get (Augmented Dickey-Fuller), unit root and stationarity tests PP (i.e., Philips- Perron) & Kwiatkowski Phillips Schmidt-Shin) is being applied to check time series data stationarity. Second, to get cointegration between the futures and spot market tests (Johansen’s Cointegration Test) was used. Granger Causality and Vector error correction models are used to get the lag relationship between futures and spot markets. The results depict the long-run relationship between the spot market and futures market, and the futures market is seen as leading in the empirical analysis of this paper. From the perspective of Investors, hedgers, and Policy Maker, Currency Futures has more helpful information to work further.