International Developments in Futures and Options

1. International Developments in Futures and Options Maia Manock Thomas Graf

2. How They Came To Be… • 13th/14th Century: Wool purchases in Europe • 1730s: Doijma Rice Exchange in Japan • 1972: CME established IMM • International exchanges modeled after CME • International Exchanges create opportunities

3. Growth of Futures/Options Figure 1

4. Major Players: Who? • Over 75 Exchanges • List of Exchanges • We will focus on LIFFE, Euronext and TFX

5. Exchange Mergers • Three of the largest in the United States all merged in about one year: • Chicago Board of Trade merged with Chicago Mercantile Exchange in July 2007. • In August 2008 these two merged with the parent company of NYMEX • Now are all under the “CME Group” • LIFFE bought out by NYSE Euronext, who owns the NYSE • All these mergers have yet to cause any significant problems • However, is massive consolidation of these exchanges a good thing?

6. Same Future, Different Exchange • Exchanges are starting to offer products usually traded on other exchanges • Dubai Gold and Commodities Exchange • Started offering oil futures normally found on NYMEX • Only sold 3,000 on the first day • Chinese Exchanges • Starting to offer a wide variety of products, many native • Corn, cotton, and soybean • Wealth no longer created half a world away

7. Future Futures • Electronic trading platforms making international trading easier & more commodities to be traded • Some products slow to be offered as futures • Steel only was offered in 2007 after being crucial for 150 years! • New derivatives (new space-age metals, renewable energy, carbon credits, etc.) • Who can think of some that might also appear soon on markets worldwide?

8. Tokyo Financial Exchange • 1989: TIFFE established • What does TFX offer? • TFX has 208 members • 1991: Electronic trading system like LIFFE • 2005: Memorandum of Understanding • 2007: Lengthening of trading hours • 2007: Two overnight interest rate futures

9. TFX • Major focus of TFX has been Euroyen futures and Yen related interest rate derivatives • Renamed from TIFFE to TFX in 2005

10. Crude Oil Futures • One of the most watched futures internationally • Sold in barrels • Current price: $40.15 (3/2/09, NYMEX) • High Price: $146 in late July 2008 • What role did speculators play in the price fluctuations? Who is responsible? • If new laws in the U.S. are passed, this will effect trading worldwide on NYMEX

11. Crude Oil Futures Price Chart

12. How responsible are speculators? • Some argue speculators inflated the price by $80, some say at most $4. • What speculators did can only been done on Energy futures • Nicknamed the “Enron Loophole” • Allows traders to electronically deal in energy without ever intending to take possession of it • What’s to stop them from affecting other forms of energy? • Obama Administration has pledged to close this loophole

13. LIFFE • 1982: LIFFE created • 1993: LIFFE merged with LTOM • 1996: LIFFE became Europe’s biggest futures exchange • BUT the DTB had more efficient technology • By 1998: LIFFE lost market power

14. LIFFE • 1998: LIFFE CONNECT created and power revived • Then in 2002: Bought out by Euronext • WHY??? • London Stock Exchange offered more! • What about the London Clearing House? 2003: Clearnet + LCH = LCH.Clearnet • Euronext Website

15. Summary • Forms of futures and options have been around for hundreds of years • Currently there are dozens of exchanges worldwide operating 24/7 • There is movement towards electronic exchanges, linking the world together • Speculators were seemingly able to manipulate the market with crude oil with worldwide ramifications • Exchanges are merging at a fast rate, now parent companies often control multiple locations often in different countries

16. Questions?

17. Class Quiz!

18. Which of the following is not a reason why Euronext was able to obtain LIFFE? A) Keep current management B) Keep its current location in London C) They offered more money than the London Stock Exchange

19. Which of the following is not a reason why Euronext was able to obtain LIFFE? A) Keep current management B) Keep its current location in London C) They offered more money than the London Stock Exchange

20. What is the difference in price of an oil future today compared to late July 2008? A) $40 B) $70 C) $100 D) $140

21. What is the difference in price of an oil future today compared to late July 2008? A) $40 B) $70 C) $100 D) $140

22. What is the value of derivatives exchanged daily on NYSE Euronext? A) $2 million B) $2 billion C) $2 trillion D) $2 zillion

23. What is the value of derivatives exchanged daily on NYSE Euronext? A) $2 million B) $2 billion C) $2 trillion D) $2 zillion

24. The Enron Loophole allows speculators to do what? A) Trade in larger quantities than others B) Trade electronically with no intention of receiving the item C) Conduct insider trading on Energy futures D) Have barrels of oil delivered for a discount and then resell them at a profit

25. The Enron Loophole allows speculators to do what? A) Trade in larger quantities than others B) Trade electronically with no intention of receiving the item C) Conduct insider trading on Energy futures D) Have barrels of oil delivered for a discount and then resell them at a profit

26. When Euronext bought out LIFFE their clearinghouses merged to become… A) LCH.Clearnet B) Liffe.Euronext C) London Clearinghouse D) EuroLondon CH

27. When Euronext bought out LIFFE their clearinghouses merged to become… A) LCH.Clearnet B) Liffe.Euronext C) London Clearinghouse D) EuroLondon CH