This thesis investigates illiquid cobalt futures prices and liquid copper and gold futures prices in regard to the unbiasedness hypothesis, price discovery, and hedge effectiveness. We use a cointegration framework to identify a potential long-run relationship between spot and futures prices. In presence of cointegration, restrictions on the cointegrating vector examines if futures prices are unbiased predictors of future spot prices. Granger non-causality and the error correction term (ECT) investigates the futures prices role in price discovery. In addition, hedge effectiveness analyzes differences in variance between a hedged and unhedged portfolio to determine futures prices past performance as a risk management tool.

With daily data of spot and futures prices with 3-months to maturity in the period from May 2010 to February 2020, we find cointegration between spot and futures prices for all commodities. The unbiasedness hypothesis holds for all futures markets, indicating the futures price to provide unbiased predictions of future spot price. The futures price is superior to spot price in the price discovery process in the long-run for gold and cobalt. For copper, futures and spot prices are both important to the price discovery process since they are affecting each other simultaneously. In the short-run price discovery, only cobalt futures show deviations from the long-run, where the spot price is leading the futures price. Hedge effectiveness reveals that copper futures provides the best hedge against spot price risk, with a portfolio variance reduction of 99%. Cobalt futures are second best with 96% variance reduction. Gold futures provides 86% variance reduction.

The findings of this thesis indicate that liquidity does not significantly affect the futures market to provide unbiased predictions of future spot price, at least for the cobalt futures market. The short-run deviations for cobalt in price discovery could be due to illiquidity. Apart from that, the cobalt futures market shares similar qualities with gold and copper futures markets.