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Futures and Options Expo 2002 – Chicago November 7, 2002 The European Futures Market: Overview and Applications C:\WINNT\Profiles\msc15\Desktop\2110409.ppt\05.

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Presentation on theme: "Futures and Options Expo 2002 – Chicago November 7, 2002 The European Futures Market: Overview and Applications C:\WINNT\Profiles\msc15\Desktop\2110409.ppt\05."— Presentation transcript:

1 Futures and Options Expo 2002 – Chicago November 7, 2002 The European Futures Market: Overview and Applications C:\WINNT\Profiles\msc15\Desktop\ ppt\05 NOV 2002\7:22 PM\1

2 The Eurex Futures Market: Overview and Applications Table of Contents The European Government Bond Market Eurex Bond Futures Volume: Average Daily Volume vs. Open Interest Market Participants Strategies/Applications –Speculation/Trading –Relative Value (Basis Trading) These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. No representation is given with respect to their accuracy or completeness, and they may change without notice. Morgan Stanley Dean Witter disclaims any and all liability relating to these materials, including without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, these materials. Potential investors should be aware that certain legal, accounting and tax restrictions, margin requirements, commissions and other transaction costs and changes to the assumptions set forth herein may significantly affect the economic consequences of the transactions discussed herein. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances. You should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine whether such information or analyses apply to your specific circumstances. Past performance is not necessarily indicative of future performance. No representation is made that any returns indicated will be achieved. These materials do not constitute an offer to buy or sell or a solicitation to buy or sell any financial instrument or participate in any trading strategy and no representation or warranty is given with respect to any future offer or sale conforming to the terms hereof. Morgan Stanley is a service mark of Morgan Stanley Dean Witter & Co. and services are offered through Morgan Stanley & Co. Incorporated. C:\WINNT\Profiles\msc15\Desktop\ ppt\05 NOV 2002\7:22 PM\2

3 The Eurex Futures Market: Overview and Applications European Government Bond Market SourceMSCI Relative Size of European Government Bond Markets by Market Capitalization (Eur) Total Market Capitalization: Eur 2.6 Trillion Austria 90 Bn France 553 Bn Germany 602 Bn Greece 100 Bn Italy 589 Bn Netherlands 153 Bn Belgium 203 Bn Finland 40 Bn Ireland 20 Bn Portugal 49 Bn Spain 229 Bn These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. No representation is given with respect to their accuracy or completeness, and they may change without notice. Morgan Stanley Dean Witter disclaims any and all liability relating to these materials, including without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, these materials. Potential investors should be aware that certain legal, accounting and tax restrictions, margin requirements, commissions and other transaction costs and changes to the assumptions set forth herein may significantly affect the economic consequences of the transactions discussed herein. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances. You should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine whether such information or analyses apply to your specific circumstances. Past performance is not necessarily indicative of future performance. No representation is made that any returns indicated will be achieved. These materials do not constitute an offer to buy or sell or a solicitation to buy or sell any financial instrument or participate in any trading strategy and no representation or warranty is given with respect to any future offer or sale conforming to the terms hereof. Morgan Stanley is a service mark of Morgan Stanley Dean Witter & Co. and services are offered through Morgan Stanley & Co. Incorporated. 1 C:\WINNT\Profiles\msc15\Desktop\ ppt\05 NOV 2002\7:22 PM\3

4 The Eurex Futures Market: Overview and Applications Eurex Bund Futures Volume Millions of Contracts These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. No representation is given with respect to their accuracy or completeness, and they may change without notice. Morgan Stanley Dean Witter disclaims any and all liability relating to these materials, including without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, these materials. Potential investors should be aware that certain legal, accounting and tax restrictions, margin requirements, commissions and other transaction costs and changes to the assumptions set forth herein may significantly affect the economic consequences of the transactions discussed herein. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances. You should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine whether such information or analyses apply to your specific circumstances. Past performance is not necessarily indicative of future performance. No representation is made that any returns indicated will be achieved. These materials do not constitute an offer to buy or sell or a solicitation to buy or sell any financial instrument or participate in any trading strategy and no representation or warranty is given with respect to any future offer or sale conforming to the terms hereof. Morgan Stanley is a service mark of Morgan Stanley Dean Witter & Co. and services are offered through Morgan Stanley & Co. Incorporated. 2 C:\WINNT\Profiles\msc15\Desktop\ ppt\05 NOV 2002\7:22 PM\4

5 The Eurex Futures Market: Overview and Applications Average Daily Futures Trading Volume vs. Current Open Interest (000’s of Contracts) (000’s of Contracts) VolumeOpen Interest 1MM 1.2MM These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. No representation is given with respect to their accuracy or completeness, and they may change without notice. Morgan Stanley Dean Witter disclaims any and all liability relating to these materials, including without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, these materials. Potential investors should be aware that certain legal, accounting and tax restrictions, margin requirements, commissions and other transaction costs and changes to the assumptions set forth herein may significantly affect the economic consequences of the transactions discussed herein. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances. You should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine whether such information or analyses apply to your specific circumstances. Past performance is not necessarily indicative of future performance. No representation is made that any returns indicated will be achieved. These materials do not constitute an offer to buy or sell or a solicitation to buy or sell any financial instrument or participate in any trading strategy and no representation or warranty is given with respect to any future offer or sale conforming to the terms hereof. Morgan Stanley is a service mark of Morgan Stanley Dean Witter & Co. and services are offered through Morgan Stanley & Co. Incorporated. 3 C:\WINNT\Profiles\msc15\Desktop\ ppt\05 NOV 2002\7:22 PM\5

6 The Eurex Futures Market: Overview and Applications Market Participants Bond and Swap Dealers Portfolio Managers Underwriters Corporate Treasurers Central Banks Hedge Fund Managers CTAs Speculators These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. No representation is given with respect to their accuracy or completeness, and they may change without notice. Morgan Stanley Dean Witter disclaims any and all liability relating to these materials, including without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, these materials. Potential investors should be aware that certain legal, accounting and tax restrictions, margin requirements, commissions and other transaction costs and changes to the assumptions set forth herein may significantly affect the economic consequences of the transactions discussed herein. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances. You should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine whether such information or analyses apply to your specific circumstances. Past performance is not necessarily indicative of future performance. No representation is made that any returns indicated will be achieved. These materials do not constitute an offer to buy or sell or a solicitation to buy or sell any financial instrument or participate in any trading strategy and no representation or warranty is given with respect to any future offer or sale conforming to the terms hereof. Morgan Stanley is a service mark of Morgan Stanley Dean Witter & Co. and services are offered through Morgan Stanley & Co. Incorporated. 4 C:\WINNT\Profiles\msc15\Desktop\ ppt\05 NOV 2002\7:22 PM\6

7 The Eurex Futures Market: Overview and Applications Strategies/Applications Duration Management Hedging Asset Allocation Index Replication Speculation/Trading Relative Value (Basis Trading) These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. No representation is given with respect to their accuracy or completeness, and they may change without notice. Morgan Stanley Dean Witter disclaims any and all liability relating to these materials, including without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, these materials. Potential investors should be aware that certain legal, accounting and tax restrictions, margin requirements, commissions and other transaction costs and changes to the assumptions set forth herein may significantly affect the economic consequences of the transactions discussed herein. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances. You should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine whether such information or analyses apply to your specific circumstances. Past performance is not necessarily indicative of future performance. No representation is made that any returns indicated will be achieved. These materials do not constitute an offer to buy or sell or a solicitation to buy or sell any financial instrument or participate in any trading strategy and no representation or warranty is given with respect to any future offer or sale conforming to the terms hereof. Morgan Stanley is a service mark of Morgan Stanley Dean Witter & Co. and services are offered through Morgan Stanley & Co. Incorporated. 5 C:\WINNT\Profiles\msc15\Desktop\ ppt\05 NOV 2002\7:22 PM\7

8 The Eurex Futures Market: Overview and Applications Speculation/Trading Volume/Open interest –Daily notional futures volume greater than underlying government bond market volume –Turnover ratios Bid/Offer spread Visible market depth Screen-based –Application of trading engines Block trading –Bund – 2000 contract minimum –Bobl – 3000 contract minimum –Schatz – 4000 contract minimum Roll costs These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. No representation is given with respect to their accuracy or completeness, and they may change without notice. Morgan Stanley Dean Witter disclaims any and all liability relating to these materials, including without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, these materials. Potential investors should be aware that certain legal, accounting and tax restrictions, margin requirements, commissions and other transaction costs and changes to the assumptions set forth herein may significantly affect the economic consequences of the transactions discussed herein. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances. You should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine whether such information or analyses apply to your specific circumstances. Past performance is not necessarily indicative of future performance. No representation is made that any returns indicated will be achieved. These materials do not constitute an offer to buy or sell or a solicitation to buy or sell any financial instrument or participate in any trading strategy and no representation or warranty is given with respect to any future offer or sale conforming to the terms hereof. Morgan Stanley is a service mark of Morgan Stanley Dean Witter & Co. and services are offered through Morgan Stanley & Co. Incorporated. 6 C:\WINNT\Profiles\msc15\Desktop\ ppt\05 NOV 2002\7:22 PM\8

9 The Eurex Futures Market: Overview and Applications Relative Value (Basis Trading) Key Points German benchmark bonds used as a proxy for EMU 1 settlement day only 6% notional coupon creates one CTD by far High penalty to fail at futures delivery Low price to fail in normal repo and cash Eurex Schatz ( years to maturity) Bobl ( years to maturity) Bund ( years to maturity) Futures Trading Strategies Investor takes outright market view Yield curve trades (i.e., 2s/10s: Schatz/Bund) Basis Trading –Benefit from possible change in CTD –Take advantage of Repo squeeze –Benefit from bonds falling out of deliverable basket Source of liquidity/hedging These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. No representation is given with respect to their accuracy or completeness, and they may change without notice. Morgan Stanley Dean Witter disclaims any and all liability relating to these materials, including without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, these materials. Potential investors should be aware that certain legal, accounting and tax restrictions, margin requirements, commissions and other transaction costs and changes to the assumptions set forth herein may significantly affect the economic consequences of the transactions discussed herein. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances. You should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine whether such information or analyses apply to your specific circumstances. Past performance is not necessarily indicative of future performance. No representation is made that any returns indicated will be achieved. These materials do not constitute an offer to buy or sell or a solicitation to buy or sell any financial instrument or participate in any trading strategy and no representation or warranty is given with respect to any future offer or sale conforming to the terms hereof. Morgan Stanley is a service mark of Morgan Stanley Dean Witter & Co. and services are offered through Morgan Stanley & Co. Incorporated. 7 C:\WINNT\Profiles\msc15\Desktop\ ppt\05 NOV 2002\7:22 PM\9

10 The Eurex Futures Market: Overview and Applications European Government Futures Deliverable Basket Trading the Basis Basis = Bond Price - (Futures Price x Bond Conversion Factor) Actual Net Basis = Basis - Carry Theoretical Net Basis = Delivery Option Value Actual Net Basis > Theoretical Net Basis –Means that the basis is rich (cash price is too high relative to futures price, or futures price is too low relative to cash price), so you would sell the basis –Rich Basis = Cheap Futures Actual Net Basis < Theoretical Net Basis –Means that the basis is cheap (cash price is too low relative to futures price, or futures price is too high relative to cash price), so you would buy the basis –Cheap Basis = Rich Futures These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. No representation is given with respect to their accuracy or completeness, and they may change without notice. Morgan Stanley Dean Witter disclaims any and all liability relating to these materials, including without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, these materials. Potential investors should be aware that certain legal, accounting and tax restrictions, margin requirements, commissions and other transaction costs and changes to the assumptions set forth herein may significantly affect the economic consequences of the transactions discussed herein. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances. You should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine whether such information or analyses apply to your specific circumstances. Past performance is not necessarily indicative of future performance. No representation is made that any returns indicated will be achieved. These materials do not constitute an offer to buy or sell or a solicitation to buy or sell any financial instrument or participate in any trading strategy and no representation or warranty is given with respect to any future offer or sale conforming to the terms hereof. Morgan Stanley is a service mark of Morgan Stanley Dean Witter & Co. and services are offered through Morgan Stanley & Co. Incorporated. 8 C:\WINNT\Profiles\msc15\Desktop\ ppt\05 NOV 2002\7:22 PM\10

11 The Eurex Futures Market: Overview and Applications Basic Trading Strategies Buy or sell the IRR versus funding cost Implied Repo Rate (IRR) is the annualized return that you would earn if you bought a bond, shorted the futures contract, and delivered the bond into the futures contract If IRR > repo rate to delivery date – lock in the repo rate and get long the basis Take advantage of special potential If a bond is likely to go special, get long the basis using overnight repo to take advantage of the potential drop in repo rate and increase in basis Take into consideration the amount outstanding on a bond and its liquidity Deliverable Basket Optionality Exploit cheapening of a bond prior to dropping out of deliverable basket – short the basis Taking a view on monetary policy Get long the basis in anticipation of a cut in interest and hence repo rates Use overnight repo to take advantage of a drop in rates and hence an increase in the basis These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. No representation is given with respect to their accuracy or completeness, and they may change without notice. Morgan Stanley Dean Witter disclaims any and all liability relating to these materials, including without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, these materials. Potential investors should be aware that certain legal, accounting and tax restrictions, margin requirements, commissions and other transaction costs and changes to the assumptions set forth herein may significantly affect the economic consequences of the transactions discussed herein. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances. You should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine whether such information or analyses apply to your specific circumstances. Past performance is not necessarily indicative of future performance. No representation is made that any returns indicated will be achieved. These materials do not constitute an offer to buy or sell or a solicitation to buy or sell any financial instrument or participate in any trading strategy and no representation or warranty is given with respect to any future offer or sale conforming to the terms hereof. Morgan Stanley is a service mark of Morgan Stanley Dean Witter & Co. and services are offered through Morgan Stanley & Co. Incorporated. 9 C:\WINNT\Profiles\msc15\Desktop\ ppt\05 NOV 2002\7:22 PM\11

12 The Eurex Futures Market: Overview and Applications European Government Futures Contract Specifications These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. No representation is given with respect to their accuracy or completeness, and they may change without notice. Morgan Stanley Dean Witter disclaims any and all liability relating to these materials, including without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, these materials. Potential investors should be aware that certain legal, accounting and tax restrictions, margin requirements, commissions and other transaction costs and changes to the assumptions set forth herein may significantly affect the economic consequences of the transactions discussed herein. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances. You should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine whether such information or analyses apply to your specific circumstances. Past performance is not necessarily indicative of future performance. No representation is made that any returns indicated will be achieved. These materials do not constitute an offer to buy or sell or a solicitation to buy or sell any financial instrument or participate in any trading strategy and no representation or warranty is given with respect to any future offer or sale conforming to the terms hereof. Morgan Stanley is a service mark of Morgan Stanley Dean Witter & Co. and services are offered through Morgan Stanley & Co. Incorporated. 10 C:\WINNT\Profiles\msc15\Desktop\ ppt\05 NOV 2002\7:22 PM\12


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