Why Nikkei Futures are Growing and Options are On the Way

 

As Japan continues along with “Abenomics” and a full turnaround of its economy, concerns have emerged that the country cannot keep up its high rate of growth seen in the first half of 2013.

A recent New York Times story focused on this idea:

Economists say some of the hardest work remains. Japan’s leaders still have not taken on the far-reaching structural changes to make the country’s businesses more competitive. The economists worry that without reform, Japan could slide back into the deflation mode that had dogged it for more than a decade

It all makes for a volatile economy, and that has heightened interest among investors in the Nikkei 225, Japan’s top equity index. Up around 40 percent on the year, the index’s growth has slowed significantly of late.

That also means heightened interest in Nikkei 225 futures. In fact, as of November 11, the average daily volume for Yen Denominated Nikkei 225 Stock Futures is up 109 percent year over year, an average of 46,900 contracts traded on each business day.

After seeing these trends, we developed an Options on Yen-Denominated Nikkei 225 futures  contract to be traded on CME Globex beginning January 13, 2014.   CME’s serial options on Nikkei 225 futures will use Osaka Securities Exchange (OSE) futures prices to determine a reference price on the serial option expiration day.  The reference price will be used to determine whether a serial option is in-the money or out-of-the-money at expiration.   Options on the Nikkei 225 futures with a quarterly expiration are exercisable into the underlying  CME futures contract.  The expiring Yen-denominated Nikkei 225 futures contract will use the Nikkei 225 Special Opening Quotation (SOQ) price as the final settlement price.

We consulted with customers to develop the new contract and they are pleased to see it. Nikkei options provide flexibility that futures cannot. To hedgers, that flexibility will be vital in what looks to continue to be a volatile market.

Japan has always been a very important market for CME Group. A number of dealers use our products in Japan, and this launch continues a long relationship with OSE that began 25 years ago with the launch of Nikkei 225 futures. That partnership gave global markets their first access to Japanese equities.  For purposes of the new options contracts we are looking to provide customers the most liquid futures at the close of Japanese hours. OSE maintains the bulk of the liquidity toward the end of Japanese hours.

In interconnected global markets, Japan will continue to play an important role. In times of volatility, market participants will need tools to manage their exposure to the country’s equities markets, and options contracts will help them do that.

 

Watch CME Group Senior Managing Director of Equity Index Products Scot Warren discuss Options on Nikkei 225 Futures.


Thomas Boggs is senior director of equity products at CME Group.

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