Eurex will launch single stock futures on 24 October, 2005, initially listing individual futures on all component issues of the European benchmark indexes Dow Jones EURO STOXX 50 and DAX, as well as t
Eurex will launch single stock futures on 24 October, 2005, initially listing individual futures on all component issues of the European benchmark indexes Dow Jones EURO STOXX 50 and DAX, as well as ten components of the Swiss SMI.
With the new single stock futures, Eurex will provide professional investors with a comprehensive product portfolio of futures and options on individual equities – all on the same platform. At the same time, the exchange will offer professional OTC market users further opportunities for non-traditional yield enhancement.
Timing is everything – Changes in EU legislation facilitates use of derivatives
Demand for futures on single stock futures has risen in the wake of recent changes to the legal environment. Recent changes in the regulatory framework, with the implementation of the amended EU directive UCITS III (Undertakings for Collective Investments in Transferable Securities) have facilitated investment in derivatives by fund management companies. Single stock futures offer fund management companies attractive opportunities to invest in cash-settled derivatives.
Wide range of applications
Single stock futures can be used as an alternative to direct equity investment. The technique uses a much smaller capital outlay compared to buying cash equity, and is particularly attractive if the equity future is ‘cheap’ to its fair value. Professional investors benefit from a diverse range of strategies:
Stock Picking: Single stock futures can be used in combination with index futures or an equity portfolio, to isolate the relative performance of one or several particular stocks to the underlying stock market. In this way the fund manager can negate outright market risk and structure a position that will benefit from the performance gap of the individual stock(s) to the underlying equity portfolio. The attraction of such a technique is that it leaves the existing portfolio intact.
Cash Equitisation: Single stock futures can be used for cash flow management. For example, a fund manager is anticipating receiving EUR X million in funds in the very near future. He has_carried out his research and knows what specific stocks he wants to invest in. However, he is worried that by the time he receives the investment the market in the particular stocks will trade higher. He uses futures on single stock futures to ‘forward fix’ the cost of his future intended investment.
Switching Investments within a Stock Market: Single stock futures can be used to alter the profile of individual stock investments within a market. A fund manager holding a portfolio of Dow Jones EURO STOXX 50® Index stocks can reduce the investment of one stock and increase the holding_of another – simply by buying and selling single stock futures.
Switching Investments between Stock Markets: Different single stock futures based on different equity indexes can be used to adjust the asset allocation of individual stocks between two different stock markets. By selling single stock futures based on one stock index and buying futures from another index, the fund manager can switch a single stock investment into a single stock investment in another market. As with switching investments within a market, the existing two equity portfolios are left intact.
The contract specifications of the new single stock futures are in line with the corresponding equity options, with maturities of up to one year and an OTC block trading size of one contract. Initial liquidity in the new futures contracts will be provided by Market Makers.
Contract Specifications: Single stock futures
|In line with the contract size of the corresponding Eurex equity option
|Minimum Price Change
|In line with the minimum price change of the corresponding Eurex equity option
|The next four quarterly months, plus the serial maturities of April, May, and July
|Last Trading Day
|Third Friday in the contract month (for futures on Italian stocks, the exchange trading day preceding the third Friday in the contract month)
|Minimum Size for OTC Block Trades