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A foray into Eurex’s Quanto Futures

Release date: 06 Jun 2017 | Eurex Exchange

A foray into Eurex’s Quanto Futures

Uncertainty and geopolitical risks have escalated to unprecedented levels across Europe and the USA during the past year. The historic decision by the electorate of the United Kingdom to leave the European Union and in addition to the presidential election in the USA, have shifted the perceptions of financial markets and investors regarding the extent the realisation of political and economic uncertainty. Therefore, the concern about the nature of the EU and together with the broader implications upon the world economy, suggests that markets will continue to demonstrate enhanced volatility in 2017. Compounded with currency risk exposures between the Euro and US Dollar, it is clear that effective risk management for investors and financial institutions will be a vital component of their strategies during 2017 and in subsequent years. 

Eurex Exchange introduced the Quanto Futures (FESQ) in March 2016, in order for clients to gain exposure to European assets, whilst mitigating the incorporated risk of EUR vs USD volatile currency fluctuations. The primary advantage of the Quanto Futures (FESQ) is that it enables investors to protect themselves from exchange rate fluctuations or those who wish to take a speculative position, whilst allowing exposure to the underlying EURO STOXX 50® Index settled in USD. The EURO STOXX 50® Index Futures (FESX) is the most liquid security at Eurex Exchange. The highly liquid product attracts significant volumes from investors and brings greater transparency to the market.

The Quanto Futures (FESQ) received strong support from several participants. Market Makers such as JP Morgan ensure that tight spreads exist in the marketplace. Moreover, the growth in terms of traded contracts and open interest, owing to the geopolitical and economic risks realised in 2016, has demonstrated the desire for clients to hedge their exposures. Additional political risks are anticipated in 2017/18 and are brought into sharper focus with key forthcoming European elections in Germany and Italy, along with the French legislative election in June 2017.

The EURO STOXX 50® USD Quanto Futures (FESQ) maturities have been extended to eight quarterly expiries as of 6th February 2017. This product enhances the ability and foresight of investors to enable them to take longer-term positions up to twenty months, on the underlying index and currency until March 2019.

 Furthermore, the Eurex T7 Entry Services (TES) minimum block size has been reduced from 1,000 to 500 contracts, supporting investors to structure bespoke bilateral agreements on off-book trades and quantities with the assuredness of standardised clearing and settlement. Finally, the Exchange for Physicals (EFPI) functionality enables investors to trade the EURO STOXX 50® Futures vs EURO STOXX 50® Quanto Futures, as a means of hedging with a reduced minimum size. This emphasises the importance for investors to minimise their inherent risks and streamline operational efficiencies within the OTC market.      

Eurex margins for the Quanto Futures (FESQ) product are evaluated daily as part of the Eurex Exchange’ risk management portfolio-margining framework, Prisma. Indicative Prisma margin requirements are shown in the graphic below. Using Eurex Derivatives, Portfolio Margin savings up 80 % can be obtained.

Disclaimer:

*In compliance with regulations, margin requirements are capped at 80%, the exceedance is charged via supplementary margin.

 

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