The housing derivatives market is the biggest single new innovation in the U.S. housing market. For the last year, a sound and secure derivatives market for U.S.housing has emerged. Investors and developers can now express their views of the housing market with CME-listed futures and options contracts and OTC forwards and options using the S&P/Case-Shiller Index. Investors for the first time can invest in a diversified housing portfolio without the large transaction or management costs.
Over the last year, some $400 million in housing derivatives traded. Many of the transactions have been options - investors and hedgers taking positions both at the money and way out of the money. This fall, the CME is planning to extend the housing futures listings to perhaps 6 years. This would give users the ability to make transactions over a wide range of timing horizons.
All parties with housing market risk will be able to:
· view a transparent, multiyear housing market; and
· take financial positions in housing prices.
These markets assist price discovery for housing, providing a predictive snapshot from the professional financial community. Through derivatives contracts, investors to increase or decrease housing price risk.
What does this all mean for the typical home owner or real estate investor? Despite the complexities, the end-consumer benefits of financial derivatives are everywhere, we just don't notice them. Mortgage rates are low in part because of mortgage market derivatives. Southwest Airlines can keep its prices low, even in the face of soaring fuel costs, in part because of successful fuel derivatives.
Because of housing derivatives, home price products like insurances and equity-participation mortgages will soon become available. The banking industry will develop structured notes that use housing prices to increase or decrease money yields. These products in turn help individuals manage how much they want to risk in real estate, and give them more options, ultimately bringing the costs of real estate transactions down and raising housing market intelligence. That's a good thing.
All opinions expressed herein are those of the author, and no statement should be as an offer to buy or sell any futures contract, or security or option or other derivative instrument. Trading of all such futures, securities, options and other derivative instruments entails significant risk which can result in substantial financial loss. Such risks should be fully understood prior to trading. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment advisor before making any investment decisions..
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