‘Event risk’ is focus for CME

By Jennifer Hughes –
The growing market in economic derivatives contracts will, from today, be offered through a joint partnership of the Chicago Mercantile Exchange and Goldman Sachs.
The decision is a sign of the contracts’ growing maturity and the latest example of the CME’s focus on products dealing with “event risk” as well as its traditional financial products.

The contracts cover the most market-moving economic data and allow investors to bet on or to hedge positions, regarding the numbers. Traditionally, the data are already market movers but, increasingly, the weight of investor positioning ahead of the numbers can affect assets’ reaction to the reports.
Goldman Sachs, which offered the contracts in 2002, will continue marketing them and providing liquidity. The CME will add centralised clearing and electronic order routing services, as well as marketing.
The CME’s involvement signals its shift towards offering products that cover event risk and new derivatives fields. Derivatives have been used to hedge against price moves in the under-lying instruments. Many are used as de facto event hedges but the other factors that move the contracts mean the link does not always work.
This year, the CME began offering weekly mid-curve options based on its flagship eurodollar contract. In effect, the instruments allow traders to take a view on forthcoming economic releases and their effect on US interest rate markets.
Last week, it added futures and options on Frost Days covering Amsterdam to its growing stable of weather-related derivatives.
Contributed by Allan Schoenberg