Rare Earth Future Contract Pricing Strategy: Revision on Traditional Commodity Methodology

Rare earth elements (REEs) are essential for advanced technologies like electronics and renewable energy systems, yet their prices fluctuate significantly due to geopolitical uncertainties, particularly China’s dominance in production. Despite their economic importance, no active futures markets exist for REEs, leaving stakeholders vulnerable to price risks. This thesis seeks to address this gap by developing a futures pricing model for REEs that accounts for geopolitical influences, adapting the traditional cost-of-carry framework to improve price risk management. The study analyzes the relationship between geopolitical risk and REE spot prices using linear regression, leveraging the Geopolitical Risk (GPR) index and price data from 2015 to 2025. The model adjusts the cost-of-carry approach by incorporating a risk premium derived from regression outcomes and then tests its performance in predicting one-month-ahead futures prices. Findings reveal a significant positive correlation between geopolitical risk and REE prices, confirming that tensions elevate costs. The proposed model achieves reasonable accuracy in stable conditions but struggles during extreme events, such as the 2020 COVID-19 crisis. This tool offers practical value for hedging in typical markets, though future refinements should integrate dynamic risk factors to enhance robustness against sudden shocks.