International International Developments in Developments in

Futures and Futures and OptionsOptionsMaia ManockMaia Manock

Thomas GrafThomas Graf

How They Came To Be…How They Came To Be…

1313thth/14/14thth Century: Wool purchases in Europe Century: Wool purchases in Europe 1730s: Doijma Rice Exchange in Japan1730s: Doijma Rice Exchange in Japan 1972: CME established IMM 1972: CME established IMM International exchanges International exchanges

modeled after CMEmodeled after CME International ExchangesInternational Exchanges

create opportunitiescreate opportunities

Growth of Growth of Futures/OptionsFutures/Options

Figure 1

Major Players: Who?Major Players: Who?

Over 75 Over 75 Exchanges Exchanges

List of Exchanges

We will focus We will focus on LIFFE, on LIFFE, Euronext and Euronext and TFXTFX

Exchange MergersExchange Mergers Three of the largest in the United States all Three of the largest in the United States all

merged in about one year:merged in about one year: Chicago Board of Trade merged with Chicago Chicago Board of Trade merged with Chicago

Mercantile Exchange in July 2007.Mercantile Exchange in July 2007. In August 2008 these two merged with the In August 2008 these two merged with the

parent company of NYMEXparent company of NYMEX Now are all under the “CME Group”Now are all under the “CME Group”

LIFFE bought out by NYSE Euronext, who owns LIFFE bought out by NYSE Euronext, who owns the NYSEthe NYSE

All these mergers have yet to cause any significant All these mergers have yet to cause any significant problemsproblems

However, is massive consolidation of these However, is massive consolidation of these exchanges a good thing?exchanges a good thing?

Same Future, Different Same Future, Different ExchangeExchange

Exchanges are starting to offer products Exchanges are starting to offer products usually traded on other exchangesusually traded on other exchanges

Dubai Gold and Commodities ExchangeDubai Gold and Commodities Exchange Started offering oil futures normally found Started offering oil futures normally found

on NYMEXon NYMEX Only sold 3,000 on the first dayOnly sold 3,000 on the first day

Chinese ExchangesChinese Exchanges Starting to offer a wide variety of products, Starting to offer a wide variety of products,

many nativemany native Corn, cotton, and soybean Corn, cotton, and soybean Wealth no longer created half a world away Wealth no longer created half a world away

Future FuturesFuture Futures

Electronic trading platforms making Electronic trading platforms making international trading easier & more international trading easier & more commodities to be tradedcommodities to be traded

Some products slow to be offered as futuresSome products slow to be offered as futures Steel only was offered in 2007 after being Steel only was offered in 2007 after being

crucial for 150 years!crucial for 150 years! New derivatives (new space-age metals, New derivatives (new space-age metals,

renewable energy, carbon credits, etc.)renewable energy, carbon credits, etc.) Who can think of some that might also Who can think of some that might also

appear soon on markets worldwide?appear soon on markets worldwide?

Tokyo Financial Tokyo Financial ExchangeExchange

1989: TIFFE established1989: TIFFE established What does TFX offer?What does TFX offer? TFX has 208 membersTFX has 208 members 1991: Electronic trading system like 1991: Electronic trading system like

LIFFELIFFE 2005: Memorandum of Understanding2005: Memorandum of Understanding 2007: Lengthening of trading hours2007: Lengthening of trading hours 2007: Two overnight interest rate 2007: Two overnight interest rate

futuresfutures

TFXTFX

Major focus of TFX has been Major focus of TFX has been Euroyen futures and Yen related Euroyen futures and Yen related interest rate derivativesinterest rate derivatives

Renamed from TIFFE to TFX in Renamed from TIFFE to TFX in 20052005

Crude Oil FuturesCrude Oil Futures One of the most watched futures One of the most watched futures

internationallyinternationally Sold in barrelsSold in barrels

Current price: $40.15 (3/2/09, NYMEX)Current price: $40.15 (3/2/09, NYMEX) High Price: $146 in late July 2008High Price: $146 in late July 2008 What role did speculators play in the What role did speculators play in the

price fluctuations? Who is responsible?price fluctuations? Who is responsible? If new laws in the U.S. are passed, this If new laws in the U.S. are passed, this

will effect trading worldwide on NYMEXwill effect trading worldwide on NYMEX

Crude Oil Futures Price Crude Oil Futures Price ChartChart

How responsible are How responsible are speculators?speculators?

Nicknamed the “Enron Loophole”Nicknamed the “Enron Loophole” Allows traders to electronically deal in energy without Allows traders to electronically deal in energy without

ever intending to take possession of itever intending to take possession of it What’s to stop them from affecting other forms of What’s to stop them from affecting other forms of

energy?energy? Obama Administration has pledged to close this loopholeObama Administration has pledged to close this loophole

•Some argue speculators inflated the price by $80, some say at most $4.

•What speculators did can only been done on Energy futures

LIFFELIFFE

1982: LIFFE created1982: LIFFE created 1993: LIFFE merged with LTOM1993: LIFFE merged with LTOM 1996: LIFFE became Europe’s 1996: LIFFE became Europe’s

biggest futures exchangebiggest futures exchange BUT the DTB had more efficient BUT the DTB had more efficient

technologytechnology By 1998: LIFFE lost market powerBy 1998: LIFFE lost market power

LIFFELIFFE

1998: LIFFE CONNECT created and 1998: LIFFE CONNECT created and power revivedpower revived

Then in 2002: Bought out by EuronextThen in 2002: Bought out by Euronext WHY???WHY??? London Stock Exchange offered more!London Stock Exchange offered more! What about the London Clearing What about the London Clearing

House? 2003: Clearnet + LCH = House? 2003: Clearnet + LCH = LCH.ClearnetLCH.Clearnet

Euronext Website

SummarySummary Forms of futures and options have been Forms of futures and options have been

around for hundreds of yearsaround for hundreds of years Currently there are dozens of exchanges Currently there are dozens of exchanges

worldwide operating 24/7worldwide operating 24/7 There is movement towards electronic There is movement towards electronic

exchanges, linking the world togetherexchanges, linking the world together Speculators were seemingly able to Speculators were seemingly able to

manipulate the market with crude oil with manipulate the market with crude oil with worldwide ramificationsworldwide ramifications

Exchanges are merging at a fast rate, now Exchanges are merging at a fast rate, now parent companies often control multiple parent companies often control multiple locations often in different countrieslocations often in different countries

Questions?Questions?

Class Quiz!Class Quiz!

Which of the following is Which of the following is not a reason why Euronext not a reason why Euronext was able to obtain LIFFE?was able to obtain LIFFE?

A) Keep current managementA) Keep current management

B) Keep its current location in B) Keep its current location in LondonLondon

C) They offered more money than C) They offered more money than the London Stock Exchangethe London Stock Exchange

Which of the following is Which of the following is not a reason why Euronext not a reason why Euronext was able to obtain LIFFE?was able to obtain LIFFE?

A) Keep current managementA) Keep current management

B) Keep its current location in B) Keep its current location in LondonLondon

C) They offered more money than C) They offered more money than the London Stock Exchangethe London Stock Exchange

What is the difference in What is the difference in price of an oil future today price of an oil future today compared to late July 2008?compared to late July 2008?

A) $40A) $40

B) $70B) $70

C) $100C) $100

D) $140D) $140

What is the difference in What is the difference in price of an oil future today price of an oil future today compared to late July 2008?compared to late July 2008?

A) $40A) $40

B) $70B) $70

C) $100C) $100

D) $140D) $140

What is the value of What is the value of derivatives exchanged daily derivatives exchanged daily

on NYSE Euronext?on NYSE Euronext?

A) $2 millionA) $2 million

B) $2 billionB) $2 billion

C) $2 trillionC) $2 trillion

D) $2 zillionD) $2 zillion

What is the value of What is the value of derivatives exchanged daily derivatives exchanged daily

on NYSE Euronext?on NYSE Euronext?

A) $2 millionA) $2 million

B) $2 billionB) $2 billion

C) $2 trillionC) $2 trillion

D) $2 zillionD) $2 zillion

The Enron Loophole The Enron Loophole allows speculators to do allows speculators to do

what?what?

A) Trade in larger quantities than othersA) Trade in larger quantities than othersB) Trade electronically with no intention B) Trade electronically with no intention

of receiving the itemof receiving the itemC) Conduct insider trading on Energy C) Conduct insider trading on Energy

futuresfuturesD) Have barrels of oil delivered for a D) Have barrels of oil delivered for a

discount and then resell them at a discount and then resell them at a profitprofit

The Enron Loophole The Enron Loophole allows speculators to do allows speculators to do

what?what?

A) Trade in larger quantities than othersA) Trade in larger quantities than othersB) Trade electronically with no intention B) Trade electronically with no intention

of receiving the itemof receiving the itemC) Conduct insider trading on Energy C) Conduct insider trading on Energy

futuresfuturesD) Have barrels of oil delivered for a D) Have barrels of oil delivered for a

discount and then resell them at a discount and then resell them at a profitprofit

When Euronext bought out When Euronext bought out LIFFE their clearinghouses LIFFE their clearinghouses

merged to become…merged to become…

A) LCH.ClearnetA) LCH.Clearnet

B) Liffe.EuronextB) Liffe.Euronext

C) London ClearinghouseC) London Clearinghouse

D) EuroLondon CHD) EuroLondon CH

When Euronext bought out When Euronext bought out LIFFE their clearinghouses LIFFE their clearinghouses

merged to become…merged to become…

A) LCH.ClearnetA) LCH.Clearnet

B) Liffe.EuronextB) Liffe.Euronext

C) London ClearinghouseC) London Clearinghouse

D) EuroLondon CHD) EuroLondon CH