Capitalize on the CME Group/MexDer Partnership Trade MexDer Equity Index (IPC) Futures
Trade MexDer Equity Index (IPC) Futures Open a New Door to Opportunity with MexDer Equity Index (IPC) Futures The CME Group/MexDer partnership has made it easier than ever to trade cross border Exchange Traded Derivatives (ETD s), with direct access to MexDer s IPC (Mexican Exchange Index) futures. Traded and cleared through MexDer, and now available on the CME Group trading platform, these contracts provide an efficient way for asset managers, mutual funds, proprietary traders, and hedge funds to manage risk and access trading opportunities in one of the world s fastest growing economies. MexDer is the derivatives subsidiary of the BMV Group, the financial exchange operator in Mexico, and the leading market place for trading derivatives on Mexican benchmarks. The Mexican Exchange, also part of the BMV Group, is Mexico s only stock exchange and represents roughly US$ 700 billion in capitalization. It is the second largest stock exchange in Latin American and the fourth largest in North America. In 2011, CME Group and MexDer joined forces, linking their trading platforms and providing easy access to a growing portfolio of derivatives products in two thriving marketplaces. The CME Group/MexDer partnership benefits customers from Mexico wishing to trade CME Group products (South-to-North) and US based customers wishing to trade Mexican derivatives (North-to-South). Regardless of trading direction, all customers benefit from the safety and security of central counterparty clearing. IPC futures are contracts based on the Indice de Precios y Cotizaciones (IPC), a capitalization-weighted index of common stocks traded on the Mexican Exchange. The index is made up of shares selected from various sectors and is designed to reflect activity across the entire Mexican economy. For detailed contract specifications go to www.mexder.com.mx. Key Benefits No local presence required in Mexico High correlation to S&P 500 and Bovespa (Brazil) Indices No Withholding Taxes CFTC approved products Co-location Collaterals accepted in US Omnibus Accounts: Rule 30.7 (CFTC) segregation One for proprietary trading One for customer trading Give ups FIA standard agreement Contract Specifications Contract Size: Face Value $10 MXN x IPC Index Example: December 2013 IPC futures at 41225 x $10 MXN = 412,250 MXN. Assuming a USD/MXN exchange rate of 13.10 pesos, the USD equivalent would be roughly $31,469 per contract. Comparatively a similar settlement in E-mini S&P 500 futures of 1662.50 results in a $83,125 value per contract. Cash settled Offered quarterly with March, June, September, and December contracts listed. Tick size: 5 IPC points. Currency converted roughly $3.82 per contract compared to E-mini S&P 500 futures tick value of $12.50. For daily volume and open interest figures contact Mexder. 2
cmegroup.com/mexder Spread trading opportunities The simultaneous buying and selling of two futures contracts against each other is known as a spread or a spread trade. Spreading one equity index futures contract against another is a common and effective way to express a view on the two respective contract markets. It can also be used to reduce outright equity index price exposure and manage risk more effectively. Spread trading can be a useful strategy for both portfolio managers as well as speculative traders. P futures x multiplier = Notional Value In this case, on September 9, 2013 the IPC futures for December delivery settled at a price of 41225. Therefore: 41225 x 10 = 412,250 Pesos per contract Spreading the IPC against the E-mini S&P 500 When evaluating any financial product and making trading decisions one must first understand how the products work. E-mini S&P 500 futures contracts traded at CME Group are based on the S&P 500 stock index, which according to Standard & Poor s, is used as the benchmark index for over $5,000 billion in funds. The E-mini S&P 500 futures contract is cash settled and trades in quarterly contract cycles with March, June, September, and December expiration months. The E-mini S&P 500 contract has a multiplier of $50 times the index. The E-minis notional value, or monetary equivalent, is a simple calculation: Price futures x multiplier = Notional Value For example: on September 9, 2013 the E-mini S&P 500 contract settled at 1662.50 which applied to the formula above results in a notional (monetary) value of $83,125 per contract 1662.50 x $50 = $83,125 The notional value is the monetary value represented by one futures contract. Because the multiplier is fixed and the futures price can fluctuate, the notional value changes as market price changes. To compare and spread between these 2 equity index contracts we must first convert the MexDer IPC notional value from pesos to dollars to get an apples-to-apples comparison. To arrive at a proper dollar-weighted hedge, or spread ratio we must take into account the exchange rate converted price levels. Therefore the spread or trade ratio should be: Spread Ratio (SR) = NV E-mini S&P 500 futures / NV IPC converted to USD The Mexican equity market benchmark is the Indice de Precios y Cotizaciones, known as the IPC Index. The federally regulated futures contract based on the IPC is traded on MexDer. The IPC futures contract is based on the IPC index times a multiplier of 10 pesos per contract. Like the E-mini S&P 500 futures it also trades in quarterly contract cycles with delivery months occurring in March, June, September, and December. To determine the notional (monetary) value of the IPC futures you follow the same formula as E-mini S&P 500 futures. 3
Trade MexDer Equity Index (IPC) Futures Referring to chart in Exhibit 1 below notice how closely correlated the IPC futures (identified as ISZ3) are to E-mini S&P 500 futures (identified as ESZ3). They trade in close correlation most of the time but diverge from time to time. A closer examination of a diverging pattern may provide possible trading opportunities. First we must establish the proper Spread Ratio (SR). In this case we ll apply the formula: SR = NV ESZ3 NV ISZ3 Exhibit 1 44000 43000 42000 41000 40000 39000 38000 IPC & E-mini S&P 500 Futures 7/1/13 7/8/13 7/15/13 7/22/13 Data Source: Bloomberg 8/16/13 7/29/13 8/5/13 ISZ3 ESZ3 8/12/13 8/19/13 1700.00 1650.00 1600.00 1550.00 On trade date August 16, 2013 ESZ3 = 1644.50 and ISZ3 = 42325. Step 1, convert each contract to notional value (NV). In this case NVESZ3 = 1644.50 x $50 = $82,225 per contract. NVISZ3 = 42325 x $10 MXN = 423,250 MXN per contract. Before we can go further we need to convert the NVISZ3 from pesos to dollars. The USD/MXN exchange rate that day was roughly 12.90. Therefore the currency converted ISZ3 = 423250 12.90 = $32,810. Notice that in early August 2013 both indices make new highs. While E-mini S&P 500 futures leveled off the IPC futures continued to higher highs. By mid-august the E-mini S&P 500 futures pulled back from recent highs and IPC futures also dropped. E-mini S&P 500 futures dropped in a greater degree relative to IPC futures causing the spread between them to narrow to recent lows. Let s consider this a good opportunity to buy the spread. Exhibit 2 2.7000 2.6500 2.6000 2.5500 2.5000 2.4500 2.4000 2.3500 Spread 7/1/13 7/3/13 7/5/13 7/7/13 7/9/13 7/11/13 7/13/13 7/15/13 7/17/13 7/19/13 7/21/13 7/23/13 7/25/13 7/27/13 7/29/13 7/31/13 8/2/13 8/4/13 8/6/13 8/8/13 8/10/13 8/12/13 8/14/13 8/16/13 8/18/13 8/20/13 8/22/13 Data Source: Bloomberg Spread Buy Spread SR = ESZ3 ISZ3 converted SR = 82225 32810 = 2.5061 or 5:2 in whole contract amounts. Exhibit 3 13.5000 13.3000 13.1000 12.9000 12.7000 12.5000 12.3000 12.1000 11.9000 11.7000 11.5000 5/6/13 6/6/13 7/6/13 8/6/13 9/6/13 10/6/13 Data Source: Bloomberg USD/MXN USD/MXN Exhibit 3 shows the exchange rate between USD/MXN. When buying this spread we will purchase E-mini S&P 500 futures (ESZ3) and simultaneously sell IPC (ISZ3) futures. How would you weight, or balance, this spread? The simplest way is by dollar weighting each side, or leg, by an equivalent dollar weighted amount of contracts. 4
cmegroup.com/mexder By mid September both indices recovered from recent lows, ESZ3 was making new highs. The spread widened in the rally providing an opportunity to unwind the trade. How did the numbers work out? Exhibit 4 IPC & E-mini S&P 500 Futures Deciding when to act Spread trading takes into account the relative value between two or more contracts. Understanding the pricing mechanism of individual futures contracts helps one determine the relative value between them. Determining the ideal time and level to enter a spread is a trading decision subject to individual evaluation. Market participants should develop their own models to determine entry and exit points. 4000 43000 42000 41000 0000 9000 8000 37000 7/1/13 7/8/13 7/15/13 7/22/13 7/29/13 8/5/13 8/12/13 8/19/13 8/26/13 9/2/13 9/9/13 9/16/13 9/18/13 9/23/13 9/30/13 10/7/13 1750.00 1730.00 1710.00 1690.00 1670.00 1650.00 1630.00 1610.00 1590.00 1570.00 1550.00 IPC futures traded on MexDer provide another tool for equity managers and traders to use in developing global trading and hedging strategies. Spread trading between IPC and E-mini S&P 500 futures is another option for risk management and trading professionals to include in their trading toolbox. Data Source: Bloomberg ISZ3 ESZ3 P&L ANALYSIS 8/16/13 Bought 20 ESZ3 at 1644.50 Sold 50 ISZ3 at 42325 USD/MXN ~ 12.90 9/18/13 Sold 20 ESZ3 at 1717.75 Bought 50 ISZ3 at 42150 USD/MXN ~ 12.65 E-mini S&P 500 leg = 1644.50-1717.75 = 73.25 points x $50 x 20 = $73,250 profit IPC leg = 42325-42150 = 175 points x $10MXN x 50 = 87500 pesos profit. 87500 / 12.65 = $6,917 73250 + 6917 = $80,167 net profit before commissions and fees. 5
Trade MexDer Equity Index (IPC) Futures Moving forward With greatly expanded access now available through the CME Group/MexDer partnership, we anticipate substantial growth across both trading platforms in the years ahead. Spread trading is just one of the ways active traders and portfolio managers can capitalize on the opportunity and deeper liquidity created by this new partnership. For more information about spread trading and additional opportunities now available to CME Group traders, please contact us today! Chicago Charles Farra charles.farra@cmegroup.com Anne Schankin anne.schankin@cmegroup.com Order Routing and Connectivity Adam Smtih smith@cmegroup.com MexDer Business Development and Customer Relations Berenice Corral bcorral@mexder.com 6
Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leveraged investment, and because only a percentage of a contract s value is required to trade, it is possible to lose more than the amount of money deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade. The information in this brochure is taken from sources believed to be reliable. It is intended for information and education only and is not guaranteed by MexDer, CME Group, or any of its subsidiaries, as to accuracy, completeness, nor any trading results. Additionally, all examples in this brochure are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience. All matters pertaining to rules and specifications herein are made subject to and are superseded by offi cial CME, CBOT and NYMEX rules. Current rules should be consulted in all cases concerning contract specifications. Eurodollar, S&P 500, Emini S&P 500, Euro / U.S. Dollar, and Mexican Dollar / U.S. Dollar contracts are listed with, and subject to the rules and regulations of, Chicago Mercantile Exchange Inc. U.S. Treasury Bond, Corn and Wheat contracts are listed with, and subject to the rules and regulations of, the Chicago Board of Trade. CME Group is the trademark of CME Group Inc. The Globe logo, Emini, Chicago Mercantile Exchange and Globex are trademarks of Chicago Mercantile Exchange Inc. The Chicago Board of Trade is a trademark of the Board of Trade of the City of Chicago, Inc. New York Mercantile Exchange is a trademark of New York Mercantile Exchange, Inc. COMEX is a trademark of Commodity Exchange, Inc. S&P 500 is a trademark of The McGraw-Hill Companies, Inc., and has been licensed for use by Chicago Mercantile Exchange Inc. All other trademarks are property of their respective owners. Copyright 2012 CME Group. All rights reserved.
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