Exchange Traded Funds Derivatives

The Case for Exchange-Based Credit Futures Contracts
This article examines the growth in the use and application of credit derivatives. It discusses the general advantages to investors that can be gained by using exchange-based futures compared to their OTC counterparts. The iTraxx© index operational framework, composition of the indexes, fixed coupon, and market quotes are explained with the aid of a Bloomberg screen and a numerical example. There is an overview of credit default swap pricing and a presentation of a Bloomberg screen that illustrates the detailed pricing output for Eurex Credit Default Swap Futures in respect of the iTraxx© Europe 5-year contract. The article focuses on the variety of ways in which credit derivatives generally are being used in today\'s markets. It presents the three Eurex Futures contracts in detail and explains how settlement will be affected both in the absence of default and when default(s) occur. The empirical section examines different investment strategies where existing iTraxx© index products could have been used to great advantage. The scenarios examined consider the total return performance of bond indexes, a single bond and an equity index when combined with existing iTraxx© benchmark indexes. The results of the study are positive and implicitly indicate uses to which corresponding exchange-based credit futures could be put.

Replicating Hedge Fund Returns Using Futures - A European Perspective
Hedge funds tend to put a lot of effort into generating their returns and charge substantial fees to do so. However, with the latest performance evaluation studies indicating that hedge fund performance is not truly superior (anymore), the question arises whether it is possible to generate similar, hedge fund-like, returns in a more mechanical way and with less effort. In other words, is it possible to design dynamic trading strategies, mechanically trading stocks, bonds, etc., that generate hedge fund-like returns? If such strategies indeed exist, then this would solve a respectable number of problems surrounding hedge fund investments and alternative investments in general, including the need for extensive due diligence, liquidity, capacity, transparency, style drift and regulatory problems, as well as excessive management fees. In this paper we develop and demonstrate the workings of a technique that allows the derivation of dynamic futures trading strategies, which generate returns with statistical properties similar to hedge funds. Trading nothing else than Eurex DAX 30 and Euro Bund futures, we show that this technique is not only capable of replicating fund of funds returns, but is equally capable of replicating individual hedge fund returns. Accurately replicating the risk-return profile, but sharing none of the drawbacks of real hedge funds, our synthetic hedge fund returns are a worthwhile alternative to direct hedge fund investment.