Eurex has announced plans to become the first European derivatives exchange to offer euro inflation futures next year. The inflation futures to be launched on January 21 next year are based on the Harmonized Index of Consumer Prices (HICP), which measures inflation in the euro zone.
The addition of exchange-traded inflation futures brings a new asset class to Eurex's product suite and complements the existing markets of inflation-linked cash products and OTC derivatives, which have seen rapidly growing volumes.
Inflation futures will be traded on Eurex with a specific market model to accommodate the fact that inflation and inflation expectations are subject to minor changes during the day. Liquidity will be concentrated in two daily auctions of 15 minutes at opening and closing where market-makers will provide liquidity. During continuous trading market-makers will quote upon request.
'With our new futures contract, we expand into a new asset class, offering our members new trading and hedging opportunities,' says Eurex board member Peter Reitz. 'Our future complements the existing OTC inflation derivatives and will significantly improve the liquidity in euro inflation bonds and derivatives markets.'
The growth of European inflation markets has boosted demand from market participants for efficient and low-cost hedging instruments for managing short-term inflation risks. The new Eurex inflation futures will also help the market to calculate prices for derivatives on forward inflation-linked bonds, which in a next step can be used to build up an inflation-linked bond options market.
The futures contract will be based on the unrevised HICP index, which covers consumer prices excluding tobacco. Calculated monthly by the Statistical Office of the European Communities, it serves as a guide for European monetary policy; the European Central Bank inflation target is based on the euro zone HICP. The annual rate measures the price change between the current month and the same month of the previous year.
Inflation-linked instruments have already been available since March 2006 on Eurex Bonds, an electronic trading platform operated by Eurex in co-operation with leading international trading firms that offers inflation-linked government bonds of France, Greece, Italy and Germany. The latter have generated turnover of almost EUR10bn (single counted) since launch and EUR6.7bn so far in 2007.
Trading hours are between 9.45 a.m. and 5.00 p.m. CET. The contract value of the new product will be EUR1m. The futures will be settled in cash; prices will be quoted in percent with two decimal places and based on 100 minus the annual inflation rate based on the HICP, and minimum price changes of 0.01 percent apply. Twenty consecutive contract months will be available for trading.