Explain the ‘Price Discovery’ Function of the Futures Market

Price discovery is the process by which the market determines the fair value of an asset. The futures market is highly liquid and attracts a wide range of sophisticated participants who trade based on all available information, including future supply, demand, and economic expectations.

The resulting futures price reflects the collective consensus of where the spot price is expected to be at a future date. This consensus price often serves as a key benchmark for the less liquid spot market.