This article gives readers an overview of the most important product initiatives launched by derivatives exchange Eurex over the past few months.
Mid-cap Segment With Greater Product Choice: Pan-European Sector Indexes Added
The initiative for expanding the mid-cap segment, launched along with the new MDAX® Future back in March of this year, continued in September with the inclusion of futures contracts on the Swiss mid-cap index SMIM®. Eurex picked up on the strong performance of mid-caps at an early stage, and has therefore - in addition to its futures contracts - been continuously expanding its range of MDAX® options since the summer of 2004. Right now, a total of twelve options on various German mid-cap stocks is currently available for trading at Eurex.
On September 19, 2005 - while simultaneously introducing futures contracts on the SMIM® - Eurex launched futures and options on the Dow Jones STOXX® Mid 200 and Dow Jones STOXX® 600 indexes. With the new futures and options on the Dow Jones STOXX® Mid 200 index, Eurex becomes the first exchange to offer derivatives on European mid-cap issues - thereby extending its presence in this segment to the whole of Europe. The Dow Jones STOXX® 600 is fast gaining in popularity, with European portfolio managers using it as their preferred benchmark. This is because the index contains the 600 largest companies by free-float market capitalization, listed in Europe (this corresponds to a coverage of 95 percent of the total market capitalization of the stocks traded in Europe). In addition to the derivatives on the Dow Jones STOXX® 600 itself, Eurex also offers futures and options on all of the 18 sectors of this index.
Designated Market-Makers ensure sufficient market liquidity.
Single Stock Futures Now Also Available
On October 24, 2005, Eurex started trading in futures on 79 individual equities included in the European benchmark indexes Dow Jones EURO STOXX 50® and DAX®, as well as on ten component issues of the Swiss market index SMI®. With these new products the exchange now offers investors a one-stop shop, with futures and options on individual equities under one roof. Market participants with no (or otherwise rather expensive) access to securities lending are now able to go short on individual stocks, for the first time. Furthermore, against the background of recent liberalizing changes in the regulatory framework for fund management companies (UCITS III Directive), the new contracts are also of particular interest to asset managers. The contract specifications of the new, cash-settled equity futures are in line with the corresponding equity options, with lifetimes of up to twelve months.
Trading Volatility as a Separate Asset Class
Eurex launched three new volatility futures on September 19, 2005. The new products are futures contracts on the 30-day implied volatility levels of options on the Dow Jones EURO STOXX 50® ('VSTOXX®'), DAX® ('New VDAX®'), and SMI® ('VSMI®') benchmark indexes. The new volatility futures make volatility tradable as a separate asset class. In this way, it is possible to trade pure volatility. Using spreads between volatility indexes, market participants are now also able to capitalize on relative shifts in volatility levels. The new indexes, on which the futures contracts are based, represent an average implied volatility level for the underlying index options. Prices for at-the-money and out-of-the-money options are aggregated to yield the average implied volatility levels for every index option expiration out to two years, which are disseminated as individual sub-indexes. The result is the implied volatility term structure, which is in turn used to determine a 30-day rolling volatility index.
On the Eurex website you will also find a current study discussing volatility and its measurements, including the design of a volatility index.
New OTC Trading Opportunities: EFPs for Index Futures
On November 14, 2005, Eurex introduced an Exchange for Physical functionality for index products ('EFPI') within the scope of Release 8.0. The new functionality is available for the entire range of equity index futures traded on Eurex. It allows users to execute transactions where an approved cash basket is traded against an appropriate number of offsetting equity index futures contracts. The nominal value of both the cash equity basket and the corresponding futures position must be substantially similar. EFPI helps to eliminate the execution risk for equity index products in basis trading, without having to renounce the benefits of exchange clearing. The cash leg of an EFPI transaction must comply with certain product-specific parameters: The nominal value of the cash basket has to be larger than a predefined minimum value of EUR 1 million or CHF 1.5 million, and may differ from the nominal value of the futures position by a maximum of 20 percent. All cash basket components must be either a part of the Dow Jones STOXX® TMI or of the Dow Jones Global Titans 50SM index. Furthermore, the relevant cash basket must comprise a minimum of ten different equity securities - or represent at least half of the equity index underlying the futures contract. And, last but not least, the aggregate nominal value of the cash basket components which are part of the futures' underlying equity index must account for at least 20 percent of the nominal value of the entire cash transaction.
Listing of FX Futures at Eurex US
On September 23, 2005, Eurex US - Eurex' regulated U.S. exchange - started to list foreign exchange futures (FX Futures), with market participants now able to benefit from access to an additional high-growth asset class as well as from a 23-hour trading platform. The product range currently comprises futures contracts on the major global currency pairs, comprising six US dollar pairs (against the euro, pound sterling, Japanese yen, Swiss franc, Australian dollar and Canadian dollar). In addition, futures are traded on some cross rates - on the euro against the yen, Swiss franc and pound sterling, as well as on the pound sterling against the yen. To enhance transparency for market participants, the contracts are quoted in line with OTC market practice. The contract size is 250,000 units of the relevant base currency.
Numerous Designated Market-Makers ensure sufficient liquidity.
Any information on the new product group is also available from the Eurex US website under www.eurexus.com .
New Euro Buxl® Future Launched
Eurex introduced a new futures contract on 30-year German government bonds on September 9, 2005, expanding its range of successful euro fixed-income products to the ultra-long ('XL') end of the yield curve. The (compared to the previous contract) lower notional coupon of 4 per cent, and a modified range of deliverable maturities - to cover bonds with a remaining term between 24 and 35 years - both offer attractive new trading opportunities. The minimum issue size for bonds included in the new Euro Buxl® Future basket is EUR 10 billion, from previously EUR 5 billion. This is designed to safeguard high liquidity and availability for delivery. Also, the tick size has been adjusted to 0.02 percent (equivalent to a value of EUR 20), to better reflect the higher risk inherent in a 30-year contract. Designated Market-Makers help boost liquidity in the new product as well. During the first seven weeks of trading, a total of more than 250,000 contracts already changed hands - more than half of which was attributable to business with end-clients. Open interest steadily rose over the same period, exceeding 27,000 contracts. Contracts on the Euro Buxl® Future are traded within tight bid/ask spreads of 1 to 2 ticks.
High Volumes in Fixed-Income Options
2005 has been a particularly successful year for fixed-income options at Eurex, underlined by strong volumes in the Options on the Euro Bund, Euro Bobl and Euro Schatz Futures. This development was facilitated by significant yield curve movements in the underlying European government bond markets, followed by increased hedging activities and speculative position-taking in fixed-income options. In addition, setting up option strategies and trading market views has become even more efficient with the introduction of Permanent Market-Making in fixed-income options on March 1, 2005. Throughout 2005, a growing number of market-makers have provided liquidity in the respective central order books on a continuous basis. These permanent quotes not only serve as reliable entry and exit levels for buying and selling options, but also serve euro government bond portfolio managers and proprietary traders as vital input factors for pricing models used to support trading decisions.
Eurex Extends Trading Hours
With effect from November 21, 2005, Eurex has extended its trading hours - as well as the OTC trade entry time for its benchmark products (euro-denominated fixed-income futures, equity index as well as EXTF® futures) - to 10:00 p.m. CET, thereby covering most of the U.S. trading day (i.e. until 3:00 p.m. Chicago time). The extended trading hours will enable Eurex participants to react directly to important news in the U.S. market, with no loss of time. Besides, the extension of the trading day into the U.S. afternoon hours will offer enhanced opportunities in terms of arbitrage and spread trading.
Following the extension of the trading schedule, daily settlement prices in the products affected by the new trading hours are now determined prior to the end of trading - i.e. at 5:15 p.m. CET and 5:30 p.m. CET for interest rate derivatives and equity as well as EXTF® products, respectively. The trading day ends at 10:00 p.m. CET, with the usual closing auction. Back on November 7, Eurex introduced a new order type within the scope of Release 8.0: For all futures contracts where the closing price is determined during a closing auction, market-on-close ("MOC") orders are now supported.
The Eurex Knowledge Center (http://www.eurexchange.com/knowledgecenter/ ) offers extensive information about Eurex, the products traded on the exchange and their applications: Eurex Publications http://www.eurexchange.com/knowledgecenter/brochures.html 
Here you can find the entire range of Eurex publications, including the monthly X-pand newsletter (http://www.eurexchange.com/about/company_info/publications/xpand.html ), various brochures and quick reference guides, as well as a series of academic research papers on interesting topics.