Futures and Options Expo 2002 – Chicago November 7, 2002 The European Futures Market: Overview and...
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Transcript of Futures and Options Expo 2002 – Chicago November 7, 2002 The European Futures Market: Overview and...
Futures and Options Expo 2002 – ChicagoNovember 7, 2002
The European Futures Market: Overview and Applications
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The Eurex Futures Market: Overview and Applications
Table of Contents
The European Government Bond Market
Eurex Bond Futures Volume: 1996-2002
Average Daily Volume vs. Open Interest
Market Participants
Strategies/Applications
– Speculation/Trading
– Relative Value (Basis Trading)
These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. No representation is given with respect to their accuracy or completeness, and they may change without notice. Morgan Stanley Dean Witter disclaims any and all liability relating to these materials, including without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, these materials. Potential investors should be aware that certain legal, accounting and tax restrictions, margin requirements, commissions and other transaction costs and changes to the assumptions set forth herein may significantly affect the economic consequences of the transactions discussed herein. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances. You should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine whether such information or analyses apply to your specific circumstances. Past performance is not necessarily indicative of future performance. No representation is made that any returns indicated will be achieved. These materials do not constitute an offer to buy or sell or a solicitation to buy or sell any financial instrument or participate in any trading strategy and no representation or warranty is given with respect to any future offer or sale conforming to the terms hereof. Morgan Stanley is a service mark of Morgan Stanley Dean Witter & Co. and services are offered through Morgan Stanley & Co. Incorporated.
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The Eurex Futures Market: Overview and Applications
European Government Bond Market
Source MSCI
Relative Size of European Government Bond Markets by Market Capitalization (Eur)Total Market Capitalization: Eur 2.6 Trillion
Austria90 Bn
France553 Bn
Germany602 Bn
Greece100 Bn
Italy589 Bn
Netherlands153 Bn
Belgium203 Bn
Finland40 Bn
Ireland20 Bn
Portugal49 Bn
Spain229 Bn
These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. No representation is given with respect to their accuracy or completeness, and they may change without notice. Morgan Stanley Dean Witter disclaims any and all liability relating to these materials, including without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, these materials. Potential investors should be aware that certain legal, accounting and tax restrictions, margin requirements, commissions and other transaction costs and changes to the assumptions set forth herein may significantly affect the economic consequences of the transactions discussed herein. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances. You should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine whether such information or analyses apply to your specific circumstances. Past performance is not necessarily indicative of future performance. No representation is made that any returns indicated will be achieved. These materials do not constitute an offer to buy or sell or a solicitation to buy or sell any financial instrument or participate in any trading strategy and no representation or warranty is given with respect to any future offer or sale conforming to the terms hereof. Morgan Stanley is a service mark of Morgan Stanley Dean Witter & Co. and services are offered through Morgan Stanley & Co. Incorporated.
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The Eurex Futures Market: Overview and Applications
Eurex Bund Futures Volume1996-2002
16.4
31.3
89.8
144.1151.3
177.9
195.0
0
50
100
150
200
250
1996 1997 1998 1999 2000 2001 2002 (Ann)
Millions of Contracts
These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. No representation is given with respect to their accuracy or completeness, and they may change without notice. Morgan Stanley Dean Witter disclaims any and all liability relating to these materials, including without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, these materials. Potential investors should be aware that certain legal, accounting and tax restrictions, margin requirements, commissions and other transaction costs and changes to the assumptions set forth herein may significantly affect the economic consequences of the transactions discussed herein. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances. You should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine whether such information or analyses apply to your specific circumstances. Past performance is not necessarily indicative of future performance. No representation is made that any returns indicated will be achieved. These materials do not constitute an offer to buy or sell or a solicitation to buy or sell any financial instrument or participate in any trading strategy and no representation or warranty is given with respect to any future offer or sale conforming to the terms hereof. Morgan Stanley is a service mark of Morgan Stanley Dean Witter & Co. and services are offered through Morgan Stanley & Co. Incorporated.
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The Eurex Futures Market: Overview and Applications
Average Daily Futures Trading Volume vs. Current Open Interest(000’s of Contracts)
444
12
462
200
777
376
606
104
615660
718
1MM
0
200
400
600
800
1000
1200
Schatz UST 2-yr NoteContract
Bobl UST 5-yr NoteContract
Bund UST 10-yr NoteContract
(000’s of Contracts)
Volume Open Interest
1MM
1.2MM
These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. No representation is given with respect to their accuracy or completeness, and they may change without notice. Morgan Stanley Dean Witter disclaims any and all liability relating to these materials, including without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, these materials. Potential investors should be aware that certain legal, accounting and tax restrictions, margin requirements, commissions and other transaction costs and changes to the assumptions set forth herein may significantly affect the economic consequences of the transactions discussed herein. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances. You should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine whether such information or analyses apply to your specific circumstances. Past performance is not necessarily indicative of future performance. No representation is made that any returns indicated will be achieved. These materials do not constitute an offer to buy or sell or a solicitation to buy or sell any financial instrument or participate in any trading strategy and no representation or warranty is given with respect to any future offer or sale conforming to the terms hereof. Morgan Stanley is a service mark of Morgan Stanley Dean Witter & Co. and services are offered through Morgan Stanley & Co. Incorporated.
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The Eurex Futures Market: Overview and Applications
Market Participants
• Bond and Swap Dealers
• Portfolio Managers
• Underwriters
• Corporate Treasurers
• Central Banks
• Hedge Fund Managers
• CTAs
• Speculators
These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. No representation is given with respect to their accuracy or completeness, and they may change without notice. Morgan Stanley Dean Witter disclaims any and all liability relating to these materials, including without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, these materials. Potential investors should be aware that certain legal, accounting and tax restrictions, margin requirements, commissions and other transaction costs and changes to the assumptions set forth herein may significantly affect the economic consequences of the transactions discussed herein. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances. You should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine whether such information or analyses apply to your specific circumstances. Past performance is not necessarily indicative of future performance. No representation is made that any returns indicated will be achieved. These materials do not constitute an offer to buy or sell or a solicitation to buy or sell any financial instrument or participate in any trading strategy and no representation or warranty is given with respect to any future offer or sale conforming to the terms hereof. Morgan Stanley is a service mark of Morgan Stanley Dean Witter & Co. and services are offered through Morgan Stanley & Co. Incorporated.
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The Eurex Futures Market: Overview and Applications
Strategies/Applications
• Duration Management
• Hedging
• Asset Allocation
• Index Replication
• Speculation/Trading
• Relative Value (Basis Trading)
These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. No representation is given with respect to their accuracy or completeness, and they may change without notice. Morgan Stanley Dean Witter disclaims any and all liability relating to these materials, including without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, these materials. Potential investors should be aware that certain legal, accounting and tax restrictions, margin requirements, commissions and other transaction costs and changes to the assumptions set forth herein may significantly affect the economic consequences of the transactions discussed herein. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances. You should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine whether such information or analyses apply to your specific circumstances. Past performance is not necessarily indicative of future performance. No representation is made that any returns indicated will be achieved. These materials do not constitute an offer to buy or sell or a solicitation to buy or sell any financial instrument or participate in any trading strategy and no representation or warranty is given with respect to any future offer or sale conforming to the terms hereof. Morgan Stanley is a service mark of Morgan Stanley Dean Witter & Co. and services are offered through Morgan Stanley & Co. Incorporated.
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The Eurex Futures Market: Overview and Applications
Speculation/Trading
• Volume/Open interest
– Daily notional futures volume greater than underlying governmentbond market volume
– Turnover ratios
• Bid/Offer spread
• Visible market depth
• Screen-based
– Application of trading engines
• Block trading
– Bund – 2000 contract minimum
– Bobl – 3000 contract minimum
– Schatz – 4000 contract minimum
• Roll costs
These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. No representation is given with respect to their accuracy or completeness, and they may change without notice. Morgan Stanley Dean Witter disclaims any and all liability relating to these materials, including without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, these materials. Potential investors should be aware that certain legal, accounting and tax restrictions, margin requirements, commissions and other transaction costs and changes to the assumptions set forth herein may significantly affect the economic consequences of the transactions discussed herein. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances. You should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine whether such information or analyses apply to your specific circumstances. Past performance is not necessarily indicative of future performance. No representation is made that any returns indicated will be achieved. These materials do not constitute an offer to buy or sell or a solicitation to buy or sell any financial instrument or participate in any trading strategy and no representation or warranty is given with respect to any future offer or sale conforming to the terms hereof. Morgan Stanley is a service mark of Morgan Stanley Dean Witter & Co. and services are offered through Morgan Stanley & Co. Incorporated.
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The Eurex Futures Market: Overview and Applications
Relative Value (Basis Trading)
Key Points
• German benchmark bonds used as a proxy for EMU
• 1 settlement day only
• 6% notional coupon creates one CTD by far
• High penalty to fail at futures delivery
• Low price to fail in normal repo and cash
Eurex
• Schatz(1.75-2.25 years to maturity)
• Bobl(4.5-5.5 years to maturity)
• Bund(8.5-10.5 years to maturity)
Futures Trading Strategies
• Investor takes outright market view
• Yield curve trades(i.e., 2s/10s: Schatz/Bund)
• Basis Trading
– Benefit from possible change in CTD
– Take advantage of Repo squeeze
– Benefit from bonds falling outof deliverable basket
• Source of liquidity/hedging
These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. No representation is given with respect to their accuracy or completeness, and they may change without notice. Morgan Stanley Dean Witter disclaims any and all liability relating to these materials, including without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, these materials. Potential investors should be aware that certain legal, accounting and tax restrictions, margin requirements, commissions and other transaction costs and changes to the assumptions set forth herein may significantly affect the economic consequences of the transactions discussed herein. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances. You should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine whether such information or analyses apply to your specific circumstances. Past performance is not necessarily indicative of future performance. No representation is made that any returns indicated will be achieved. These materials do not constitute an offer to buy or sell or a solicitation to buy or sell any financial instrument or participate in any trading strategy and no representation or warranty is given with respect to any future offer or sale conforming to the terms hereof. Morgan Stanley is a service mark of Morgan Stanley Dean Witter & Co. and services are offered through Morgan Stanley & Co. Incorporated.
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The Eurex Futures Market: Overview and Applications
European Government Futures Deliverable Basket
Bund Futures Deliverable Basket 31/10/02
Future Price: 110.82 Settle: 5-Nov-02 Delivery: 10-Dec-02
Price YieldConversion
Factor Accr. Int. RepoGrossBasis Net Basis IRR
DBR 5.0000% 4-Jul-11 103.66 4.477 0.934161 1.6986 3.3 0.136 -0.005 3.350
DBR 5.0000% 4-Jan-12 103.57 4.514 0.931496 4.1781 3.3 0.342 0.208 1.316
DBR 5.0000% 4-Jul-12 103.41 4.553 0.928434 1.6986 3.3 0.521 0.379 -0.406
Trading the BasisBasis = Bond Price - (Futures Price x Bond Conversion Factor)Actual Net Basis = Basis - CarryTheoretical Net Basis = Delivery Option Value
• Actual Net Basis > Theoretical Net Basis
– Means that the basis is rich (cash price is too high relative to futures price, or futures price is too low relative to cash price), so you would sell the basis
– Rich Basis = Cheap Futures
• Actual Net Basis < Theoretical Net Basis
– Means that the basis is cheap (cash price is too low relative to futures price, or futures price is too high relative to cash price), so you would buy the basis
– Cheap Basis = Rich Futures
These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. No representation is given with respect to their accuracy or completeness, and they may change without notice. Morgan Stanley Dean Witter disclaims any and all liability relating to these materials, including without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, these materials. Potential investors should be aware that certain legal, accounting and tax restrictions, margin requirements, commissions and other transaction costs and changes to the assumptions set forth herein may significantly affect the economic consequences of the transactions discussed herein. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances. You should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine whether such information or analyses apply to your specific circumstances. Past performance is not necessarily indicative of future performance. No representation is made that any returns indicated will be achieved. These materials do not constitute an offer to buy or sell or a solicitation to buy or sell any financial instrument or participate in any trading strategy and no representation or warranty is given with respect to any future offer or sale conforming to the terms hereof. Morgan Stanley is a service mark of Morgan Stanley Dean Witter & Co. and services are offered through Morgan Stanley & Co. Incorporated.
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The Eurex Futures Market: Overview and Applications
Basic Trading Strategies
Buy or sell the IRR versus funding cost
• Implied Repo Rate (IRR) is the annualized return that you would earn if you bought a bond, shorted the futures contract, and delivered the bond into the futures contract
• If IRR > repo rate to delivery date – lock in the repo rate and get long the basis
Take advantage of special potential
• If a bond is likely to go special, get long the basis using overnight repo to take advantage of the potential drop in repo rate and increase in basis
• Take into consideration the amount outstanding on a bond and its liquidity
Deliverable Basket Optionality
• Exploit cheapening of a bond prior to dropping out of deliverable basket – short the basis
Taking a view on monetary policy
• Get long the basis in anticipation of a cut in interest and hence repo rates
• Use overnight repo to take advantage of a drop in rates and hence an increase in the basis
These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. No representation is given with respect to their accuracy or completeness, and they may change without notice. Morgan Stanley Dean Witter disclaims any and all liability relating to these materials, including without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, these materials. Potential investors should be aware that certain legal, accounting and tax restrictions, margin requirements, commissions and other transaction costs and changes to the assumptions set forth herein may significantly affect the economic consequences of the transactions discussed herein. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances. You should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine whether such information or analyses apply to your specific circumstances. Past performance is not necessarily indicative of future performance. No representation is made that any returns indicated will be achieved. These materials do not constitute an offer to buy or sell or a solicitation to buy or sell any financial instrument or participate in any trading strategy and no representation or warranty is given with respect to any future offer or sale conforming to the terms hereof. Morgan Stanley is a service mark of Morgan Stanley Dean Witter & Co. and services are offered through Morgan Stanley & Co. Incorporated.
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The Eurex Futures Market: Overview and Applications
European Government Futures Contract Specifications
German 10-Year (Bund) German 5-Year (Bobl) German 2-Year (Schatz)
Exchange EUREX EUREX EUREX
Size EUR 100,000 par value EUR 100,000 par value EUR 100,000 par value
Notional Coupon 6% 6% 6%
Deliverable Basket Bundesanliehe bonds with 8½ to10½ years remaining to maturity asof the 10th calendar day of the deliverymonth and a minimum issue amountor EUR 2 billion
Bundesobligationen,Bundesschatzanweisungen andTreuhand with a remaining life of 4½to 5½ years and a minimum issueamount or EUR 2 billion
Bund, Bobl, Schatx or Treuhandanstaltissued by the German FederalGovernment with a remaining life of1¾ to 2¼ years and a minimum issueamount or EUR 2 billion
Price Quotes In percentage of par value, carried outtwo decimal places
In percentage of par value, carried outtwo decimal places
In percentage of par value, carried outtwo decimal places.
Tick Size and Value 0.01 percent (EUR 10) 0.01 percent (EUR 10) 0.01 percent (EUR 10)
Daily Price Limit None None None
Trading Hours(Local Time)
08:00-19:00 08:00-19:00 08:00-19:00
Delivery Months March, June, September, December March, June, September, December March, June, September, December
Last Trading Day 12:30, 2 business days prior toDelivery Day
12:30, 2 business days prior toDelivery Day
12:30, 2 business days prior toDelivery Day
Delivery Day(s) 10th calendar day of delivery month(or next business day if holiday)
10th calendar day of delivery month(or next business day if holiday)
10th calendar day of delivery month(or next business day if holiday)
These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. No representation is given with respect to their accuracy or completeness, and they may change without notice. Morgan Stanley Dean Witter disclaims any and all liability relating to these materials, including without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, these materials. Potential investors should be aware that certain legal, accounting and tax restrictions, margin requirements, commissions and other transaction costs and changes to the assumptions set forth herein may significantly affect the economic consequences of the transactions discussed herein. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances. You should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine whether such information or analyses apply to your specific circumstances. Past performance is not necessarily indicative of future performance. No representation is made that any returns indicated will be achieved. These materials do not constitute an offer to buy or sell or a solicitation to buy or sell any financial instrument or participate in any trading strategy and no representation or warranty is given with respect to any future offer or sale conforming to the terms hereof. Morgan Stanley is a service mark of Morgan Stanley Dean Witter & Co. and services are offered through Morgan Stanley & Co. Incorporated.
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