This study investigates the relationship between futures prices and their underlying spot prices of the stocks trading on Karachi Stock Exchange. Data on the monthly closing prices of future contracts and their underlying stocks of 30 companies for the period January 2004 to June 2014 have been taken for analysis. Descriptive statistics, Augmented Dicky Fuller test for unit root testing, Johnson Co-integration test, Granger causality test, Vector Error Correction Model, Impulse response function, and Variance Decomposition Analysis are used. The study finds significant long term relationship between Spot prices and Futures prices in case of 26 companies. The report of Granger causality test indicates that a Bi-directional causality lack to exist in case of each company, however Futures prices of 6 securities helps in forecasting their respective spot prices. In case of 7 companies spot prices are forecasting Futures prices. VECM shows that Spot prices for current month are effected by previous month prices in case of 7 companies, while futures prices of current month are affected by previous month prices in case of 4 companies. VECM also shows that futures prices of current month were effected significantly by futures prices of previous month in case of 6 companies, while spot prices of current month are affected by futures prices of previous month in case of 6 companies as well. Variance decomposition analysis shows that the volatility shocks in spot market is less effected by futures market, however the volatility shocks in futures market were strongly and significantly affected by spot market volatility. This effect is reported in almost all of the companies studied. Impulse response function shows that the volatility shocks in spot market are relatively less affected by shocks occurring in futures market. However, futures market which are found influenced by spot market volatility shocks. Supervisor:- Dr. Arshad Hassan