CBOT To Launch Futures Contract Based on Dow Jones U.S. Real Estate Index

[MrPaul 10]

Got this in an email today, looks interesting

 

The Chicago Board of Trade (CBOT®) today announced plans to launch a new stock index futures contract based on the Dow JonesSM U.S. Real Estate Index. The electronically-traded Dow Jones U.S. Real Estate (DJUSRE) Index futures contract, to be launched during the first quarter of 2007, will allow market participants to capitalize on changes in the real estate sector of the stock market, and better manage commercial real estate exposure.

 

The new contract, to be launched under a licensing agreement between the CBOT and Dow Jones, will settle to the value of the Dow Jones U.S. Real Estate Index, an index comprised primarily of Real Estate Investment Trusts (REITs). REIT securities serve as an accurate proxy for the underlying U.S. commercial real estate market because lease rates, vacancies, development costs and property transaction values are all reflected in REIT share prices.

 

Robert D. Ray, Senior Vice President of Business Development at the CBOT said, “Commercial real estate remains one of the largest classes of tradable assets not currently served by an exchange-traded futures instrument. We developed this contract after researching the U.S. commercial real estate market and conducting various conversations with real estate portfolio managers and pension funds who seek new avenues for managing the risks associated with property ownership. Moreover, since the underlying instrument is an equity index, it also provides investors with an efficient means to express their views on movements in the real estate market, with the added advantages of transparency, leverage, liquidity and the ability to more efficiently short the market.â€Â

 

According to Michael A. Petronella, President, Dow Jones Indexes, “The Dow Jones U.S. Real Estate Index is a transparent and rules-based tool to measure the performance of a U.S.-based real estate equity portfolio. As a benchmark recognized by commercial real estate owners and foreign investors seeking exposure to U.S. real estate markets, this index is an ideal underlying for a futures contract."

 

The new DJUSRE Index futures contract will trade on the CBOT electronic trading platform from 6:15 p.m. – 4:00 p.m. CT (the following day), Sunday through Friday. The contract, which will be settled in cash, has a value equal to $100 multiplied by the value of the DJUSRE Index. The CBOT is also creating a market maker program for the new DJUSRE Index futures contract to ensure a two-sided market will be available to market participants.

 

For additional information on the DJUSRE Index futures contract, please click here.

[torero 10]

This is a very interesting product as it matures, I'm sure it'll be a major vehicle with good volume. It's the only industry where risk exposure is still high.

 

Now, one question. Once this product is full swing, then they will add options on these products. After that, volatility will increase. Now, the big question is will the real real estate market will become just as volatile to reflect the futures products? I think ever since futures and options were introduced for indices and single stocks, I think they've gotten more volatile. Agree or disagree?

[brownsfan019 17]

Hopefully something like this could take off. I never get my hopes up anymore though... the Big Dow, the Int'l futures contract (MSCI), the Russell 1000, Asian based, the Biotech contract, etc. etc.

 

I've learned after awhile to not get your hopes up on any contract being a success. If anything, it takes MANY months/years for a contract to gain some interest.

[torero 10]

If this is the only game in town (REIT) than it may just do that. It's only vehicle to hedge housing price losses. So it's possible during the price declines in housing markets, we may see more volume and vice versa for period of appreciation for homes?

[brownsfan019 17]

If this is the only game in town (REIT) than it may just do that. It's only vehicle to hedge housing price losses. So it's possible during the price declines in housing markets, we may see more volume and vice versa for period of appreciation for homes?

 

Tor - I appreciate your theory.

 

However, the MSCI is one of (if not the only) international based futures contract (http://www.cme.com/trading/prd/overview_EFE16575.html). The S&P Asia 50 is a very unique product as well that is still struggling for interest (http://www.cme.com/trading/prd/overview_PA16059.html).

 

Just providing something to think about. At one time, I used to think the same thing - a new and 'different' contract is just what the market needs and more importantly, what I need... It was never about the products.