beliavsky[at]aol.com wrote:
- quote -

B, I understand that, but you seem to be overlooking the risks during
the holding period because of the (arguably arbitrary) pricing. If I
don't know how the counterparty is determining an acceptable price to
quote, and hedging their risks, then I have no basis for expectations
about the contract price a year from today, 18 months from today, etc.
It's a price-discovery problem. It's not enough to be "right" about home
prices three years from now, if exchange-dictated pricing based on
expectations about that price moves far against you along the way. As
you mentioned, these are marked to market and the contract values are
quite large. If there were decent volume then this would be less of a
concern but the ones we were looking at had literally no volume.

The other markets you mentioned (stock indices, Eurodollars) are
completely different, they have extremely high transaction volume and
easy hedging mechanisms -- so I have much more faith in price discovery
and I myself can hedge risks related to the mark-to-market accounting.

- quote -

Actually I didn't think of all this, they were the concerns of someone I
was talking with, a CFA who prices derivatives for a major investment
bank. Those are completely different underlying assets and markets.

-Tad

beliavsky[at]aol.com wrote:
- quote -

So if I understand correctly: $175 means the index reflects an average
(via a complex weighting of cities) price of $175,000. Since the
contracts are X250, one might buy 4 contracts to duplicate the gain/loss
of the theoretical averaged house.
On some planet, one who decides their exposure to real estate via their
own home is too large can short a sufficient number of contracts to
cancel off some fraction of that exposure, in 1/4 multiples of the
average house.
For the person who shorted 1/2 house, and given the nature of
settlements, if the house fell in value by say $30K, the person will
find they have gained $15,000 and the contract is expired. If the house
went up $60,000, they now owe $30,000 at settlement and would need to
come up with the money (as Future Contract don't require 100%, they
would actually be subject to a series of margin calls).

I don't know that any individual is likely to do any of this, no more
likely than shorting a T-bond contract as a hedge against rising rates
to counter that rate adjustment. I imagine these contracts are mostly
held by speculators just like the metals and grains, with only a small
portion ever closing with an actual delivery. (of course here, there's
no delivery, I refer only to the volume of contract used by traders, not
anyone with real interest in the end product).

JOE

On Dec 12, 9:02 pm, Tad Borek <bore...[at]pacbell.net> wrote:
- quote -

I have a brokerage account at OptionsXpress, which allows one to trade
ETFs, mutual funds, stocks, stock options, futures, and futures
options from a single account. I like it. If I go to trading screen
for the November 2010 composite (national) housing futures, I see

Composite Housing Idx NOV 2010
178.80 0.00 B: 174.00 (2) A: 178.80 (2)

which means I can get filled for at least two contracts at either
174.0 or 178.8 . One point equals $250, so 2 contracts are worth about

$175 * 2 * 250 = $87,500 .

Over a few days, I think one could accumulate 20 contracts long or
short.

- quote -

You don't need to know who the counterparty is of an exchange-listed
futures contract -- that's the advantage of exchange-listed
derivatives over OTC ones. Ultimately, the exchange is the
counterparty. Housing futures are cash settled at expiration, based on
the published values of the Case-Shiller indices at that time. If you
bought one contract at 175 and the index is 200 at expiration, you
make

$50 * $250 = $12500

by that time. Between the time you bought the contract and expiration,
cash would flow in and out of your account based on the daily
settlement price of the contract.

- quote -

Please excuse me for saying that your concerns sound like those of
someone who has never traded futures. Cash-settled futures have been
around since the early 1980s, and they work well for stock indices and
Eurodollars. It is true that housing futures may not be liquid enough
at this time for some investors, and many people do find futures
"foreign". Another question would be if the Case-Shiller indices can
be trusted to track average house prices in the future.

- quote -

beliavsky[at]aol.com wrote:
- quote -


I was just having a discussion about these with another finance type who
lives in a city that will remain nameless, but whose CME futures'
pricing is "curious," at least based on the delayed quotes on that site
you linked to.

One concern is that there doesn't appear to be any volume for those
longer-dated contracts, so I don't know how valid the quotes are -- or
even how they're determined (if there are no transactions, how can there
be any price discovery?).

And really, I've only read about these in the hypothetical, where
Shiller talks about hedging exposure to housing using derivatives tied
to his indices. But I haven't followed how it's been implemented...like
who is the counterparty, and how do they make good on settlement?
There's nothing akin to that big oil storage facility in who-knows-where
Oklahoma. A big tank full of Edwardian flats.

-Tad

Futures on house price indices, based on the S&P/Case-Shiller Metro
Area Home Price Indices, now trade at the Chicago Mercantile Exchange
http://www.cme.com/trading/prd/re/housing.html . The bid-ask spreads
of the national August 2008 and November 2010 contracts are about 1.4%
and 4.2%, and the current mid-quotes are 200 and 177.1. The Nov 2010
contract trading much lower than the August 2008 contract reflects
expectations that house prices will continue to fall.

Converted to an annual expense ratio, (4.2%/2) * (1/3) is about 0.7%
-- the justification for the 1/2 factor is that the contracts are cash
settled and could be held through expiration. Someone who wants to
speculate that house prices will not fall as much as the Nov 2010
futures predict could find buying the futures contract to be less
expensive than buying an investment property. Someone who has a lot of
wealth tied up in their home could sell the futures to hedge price
risk.

I'm not recommending anyone go long or short, just thinking out loud.
I don't work for the CME or a futures brokerage, but I do trade for my
own account and work for a firm that trades futures.