5.2 Over-the-Counter Products
5.2.3 TRADING PLATFORMS AND EXCHANGE TRADED INSTRUMENTS The first evidence of property derivatives traded on an exchange comes
Table 5.4. Total return swaps bid, offer and mid prices for the IPD UK All Property Total Return index on 23 December 2008.
Maturity end of month Maturity in years Bid (%) Offer (%) Mid (%)
December 2008 1 –21.00 –20.00 –20.50
December 2009 2 –20.25 –19.25 –19.75
December 2010 3 –15.00 –13.50 –14.25
December 2011 4 –9.25 –7.75 –8.50
December 2012 5 –5.25 –4.25 –4.75
December 2013 6 –3.75 –2.25 –3.00
Note: The calculation year in all total return swaps is December 2007.
Property-Trust futures on the S&P/ASX200 Listed Property-Trust index. The underlying index in this futures contract had 23 constituents and a market capitalization of 77 billion AUD. This was followed in 2005 by the Sydney Futures Exchange that also offered futures on the Dow Jones Australia Listed Property-Trust index. The underlying index for this futures contract had 15 constituents, all liquid trusts.
Eurex began trading property futures on February 9, 2009. These Eurex IPD futures contracts are annual contracts based on the total returns of the IPD index3 for individual calendar years. With the introduction of this futures contract, Eurex seeks to eliminate counterparty risk, to improve liquidity to the commercial property sector of the real-estate property market, and to attract a complete range of potential participants in this asset class. Additional futures contracts have been launched by Eurex on IPD property indices, such as the UK sector indices (Offices, Retail, Industrial) and other European indices (initially France and Germany) on a demand-led basis.
EUREX IPD futures
The IPD futures contract will be settled upon the total returns of the index for an individual year. A particular feature of this contract, as opposed to other futures contracts in other asset classes such as equity, foreign exchange, or commodity, is that the calculations period is end of December to end of December, while the actual expiry maturity is end of March to end of March.
This is done in order to allow the publication of the index after the end period in December. The Eurex property IPD index futures have no counterparty risk, carry no VAT, stamp duty, agents, and legal fees.
3 The IPD UK Annual Property Total Return Index is value-weighted and it measures un-geared total returns to direct UK property investments using time-weighted methodology based on monthly returns compounded for the purposes of the annual index construction. Each property covered contributes proportionally to its capital employed.
Example 5.3. For example, the IPD futures contract for maturity December 2009 will expire on 31 March 2010 since the last day in March is a trading day. Each day there are five successive annual contracts available on a December calendar roll maturity.
Each contract is cash settled on the first exchange day after the last trading day, calculated to two decimal places and rounded to the nearest 0.05. The IPD futures contract has a nominal size of £50,000 and a par value of 100, with a minimum price change of 0.05 that represents £25. Usual transactions are between £1m and £25m.
The transaction costs for trading a futures contract via Eurex vary between 0.1% and 0.5%, depending whether brokers are employed or not. If similar trades are conducted in the spot market the transaction costs may reach 7%
(PDIG, 2015).
The final settlement index IPD futures contracts price formula is given by 100× TRIt
TRIt−1 (5.1)
whereTRItis the total returns index value at the end of the annual index cal- culation period, whileTRIt−1is the total returns index value at the beginning of the annual index calculation period. Interestingly, the final settlement price will be calculated to three decimal places and rounded to the nearest 0.005 or 0.01.
Example 5.4. For example, the final settlement price for the 31st December 2009 maturity IPD index futures was equal to 85.50 because the IPD index at 31st December 2008 was 1178.0732 and the IPD index at 31st December 2009 was 1007.2526.
One of the great advantages of being able to trade futures on the IPD index is the possibility to implement trades along the curve. For example, an investor may go long the five years IPD index futures and short the two years IPD index futures. This combined trades effectively give no exposure to commercial real- estate risk in the UK for the first two years and it implies that this sector will start increasing again thereafter. This trading strategy would have been very beneficial in the aftermath of the subprime crisis.
In Figure 5.6 we illustrate the evolution of the indexIPD futures contracts!
futures curves for the IPD index traded on Eurex in London. The contracts seem to experience a stationary almost flat evolution for the back end maturi- ties while there seems to be more activity for the near end maturity. This is in line with the Samuelson effect.4
4The Samuelson effect claims that the volatility of futures prices increases as the contract delivery date approaches.
90 95 100 105
Eurex price
110 115 120
03/01/2011 03/02/2011 03/03/2011 03/04/2011 03/05/2011 03/06/2011 03/07/2011 03/08/2011 03/09/2011 03/10/2011 03/11/2011 03/12/2011 03/01/2012 03/02/2012 03/03/2012 03/04/2012 03/05/2012 03/06/2012 03/07/2012 03/08/2012 03/09/2012 03/10/2012 03/11/2012 03/12/2012 03/01/2013 03/02/2013 03/03/2013 03/04/2013 03/05/2013 03/06/2013 03/07/2013 03/08/2013 03/09/2013 03/10/2013 03/11/2013 03/12/2013 03/01/2014 03/02/2014 03/03/2014 03/04/2014 03/05/2014 03/06/2014 03/07/2014 03/08/2014 03/09/2014 03/10/2014 03/11/2014 03/12/2014 03/01/2015 03/02/2015 03/03/2015 IPD UK All Property Futures
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19
Figure 5.6.The IPD index futures settlement prices, daily between 3 Jan 2011 and 5 Mar 2015.
Notes: The contracts are traded with fixed maturities March 2011, March 2012, March 2013, March 2014, March 2015, March 2016, March 2017 and March 2018.
Source of data: Eurex, London
Table 5.5. Summary statistics of the IPD index futures settlement prices, daily between 3 Jan 2011 and 5 Mar 2015.
2011–03 2012–03 2013–03 2014–03 2015–03 2016–03 2017–03 2018–03 2019–03 Mean 114.96 106.51 101.89 104.16 106.33 104.32 103.97 104.05 104.50 Median 115.10 106.70 101.50 104.10 104.00 104.00 104.00 104.50 104.50 Mode 115.10 107.75 101.00 101.20 102.65 102.90 105.25 104.50 104.50
std 0.34 1.25 1.29 2.59 5.20 1.69 0.95 0.58 0.00
Kurtosis 2.92 –0.92 –1.12 0.05 0.51 –0.13 –1.48 –0.55
Skewness –1.72 –0.58 0.51 0.88 1.43 0.98 0.34 –1.00
Minimum 113.80 103.75 100.00 101.10 101.25 102.25 102.25 103.00 104.50 Maximum 115.25 108.05 104.20 110.62 118.00 108.25 106.10 104.50 104.50 Count 64.00 322.00 574.00 828.00 1063.00 999.00 741.00 489.00 235.00 Notes: The contracts are traded with fixed maturities March 2011, March 2012, March 2013, March 2014, March 2015, March 2016, March 2017, and March 2018.
Source of data: Eurex, London.
The summary statistics described in Table 5.5 convey a more informed view.
The March 2015 maturity contract has had the largest interquartile range of 17.75. The overall view offered by the values summarized in the table indicate a moderate optimism reflected by small growth in the commercial property sector in the UK. The absolute maximum growth implied from the futures on IPD over the January 2011 to March 2015 was the 18% growth in the March 2015 contract. The longer maturity contracts have very small standard deviations in general.
– 2,000 4,000 6,000 8,000
Number of contracts
10,000 12,000 14,000 16,000
2009–03–10 2009–04–22 2009–06–03 2009–07–14 2009–08–24
2009–10–02 2009–11–12 2009–12–23 2010–02–04 2010–03–17 2010–04–29 2010–06–09 2010–07–20 2010–08–30 2010–10–08 2010–11–18 2010–12–29 2011–02–08 2011–03–21 2011–05–03 2011–06–13 2011–07–22 2011–09–01 2011–10–12 2011–11–22 2012–01–03 2012–02–13 2012–03–23 2012–05–08 2012–06–18 2012–07–27 2012–09–06 2012–10–17 2012–11–27 2013–01–10 2013–02–20 2013–04–04 2013–05–16 2013–06–26 2013–08–06 2013–09–16 2013–10–25 2013–12–05 2014–01–20 2014–02–28 2014–04–10 2014–05–26 2014–07–04 2014–08–14 2014–09–24 2014–11–04 2014–12–15 2015–01–28
Figure 5.7. The IPD UK Annual All Property futures open interest, daily between 10 March 2009 and 11 February 2015.
Source of Data: Eurex, London.
Figure 5.7 shows the evolution of open interest for IPD UK. All Property futures traded on Eurex. There is a clear increasing trend but when compared with the spot real-estate market there is a lot more trading that needs to be done.
S&P/Case-Shiller Index Futures
In May 2006, CME introduced housing futures and options contracts based on the S&P/Case-Shiller indices to enable hedging and speculation in US residential real-estate. As of 2009, there are futures contracts with maturities extending 18 months into the future, listed on a quarterly cycle of February, May, August, and November; futures contracts with maturities extending 19 to 36 months into the future, listed on a bi-annual schedule May and November;
and futures contracts with maturities going from 37 months to 60 months into the future, listed on an annual schedule with November maturity. The futures contracts trade at $250 times the index with a tick of $50, while the options trade on one futures contract with a tick of $10, for a range of strikes at five index point intervals from the previous day close price of the futures on the Case-Shiller Index. There are futures for 10 US cities (Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York City, San Diego, San Francisco and Washington D.C.), in addition to the composite index contain- ing all 10 cities. On CME over-the-counter bespoke contracts are also traded, with major Wall Street dealers trading on platforms such as TFS. More details can be found about the CME CS at www.cme.com. Options such as call and put are also traded on the Case-Shiller Index but with a one-year maturity.