Lecture%2027 - Lecture 27 Index Derivatives continued. I....

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
Lecture 27 Index Derivatives continued… I. Index derivatives can be used to hedge risks for illiquid assets that seldom trade. Real Estate: - real estate prices are highly correlated. While an individual house may seldom trade an index derived from the sale prices of all houses in the local market will generally track the rise and fall of the individual house price. - CME Housing Futures are future and option contracts cash settled against an index based on home sale prices in major metropolitan housing markets. - These futures and option contracts allow investors to buy or sell a portion of their real estate exposure. Over-the-counter (OTC) derivative indexes: - Many financial institutions have exposure to securities that do not trade on any exchange. - These OTC securities often have unique risks that can not be easily hedged by exchange traded stocks and bonds. This is known as “Basis Risk” - Futures and options can be purchased on broad based indexes of asset- backed securities (ABX), credit default swap indexes (CDX) and Mortgage Backed Securities (CMBS).
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
II. The returns of any dynamic strategy can be replicated by an index. Investors who are exposed to the strategy as a consequence of their business and investors who wish to have more exposure can trade index based derivatives to gain exposure without facing the transaction costs of the dynamic strategy. - Examples: RER, BXU, DGD, DMJ, SNJ Link to RER’s IPO prospectus: http://www.sec.gov/Archives/edgar/data/65100/000119312508072690/d424b3 .htm
Background image of page 2
Merrill Lynch Strategic Return Notes 8% CBOE S&P 500 Buy-Write Index 1/3/2011 Ticker Symbol: BXU CUSIP: 59021V763 Exchange: AMEX Security Type: Special Product - Index Based SECURITY DESCRIPTION: Merrill Lynch & Co. Inc., 8% Monthly Income Strategic Return Notes linked to value of the CBOE S&P 500 BuyWrite Index (AMEX: BXAIN, starting value 100 as of 12/28/2005), due 1/3/2011, and issued at $10 per Unit. The CBOE Index tracks the performance of a hypothetical covered call strategy on the S&P 500 Index by reflecting dividends and certain price changes of the stocks comprising the S&P 500 Index and the
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/12/2008 for the course ECON 435 taught by Professor Chabot during the Winter '08 term at University of Michigan.

Page1 / 5

Lecture%2027 - Lecture 27 Index Derivatives continued. I....

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online