Euro Special - Part IV
Eurospecial - derivatives in Euroland
One of the most evident results of EMU is of course the emergence of a
single money market. There will be just one euromoney rate curve for
anything between one day and two years, as well as new reference interest
rates, for instance an EURIBOR. The confluence of interest rates in Europe,
however, will cause a number of options to disappear, because of the
disappearance of differences in interest rates, exchange rates etc, i.e. all the
points that mark an inefficient market and a call for arbitrage. A number of
exchange rate and interest rate options will get the rug yanked from under
their feet. The importance of different instruments, specially of interest
futures, options and swaps, compared to the equity market is evident from
the following table:
Open interest EOY in BUS$ Yly growth
Products 1993 1995 1996 1993 - 1996
Regulated market:
Interest rate futures 4.959 5.863 5.931 20
Interest rate options 2.362 2.742 3.278 39
Exchange rate futures 35 38 50 45
Exchange rate options 76 43 47 -38
Stock index futures 110 172 199 81
Stock options 230 329 380 66
Reg. market (total) 7.771 9.188 9.885 27
OTC:
Interest rate swaps 6.177 12.811 19.171 210
Exchange rate swaps 900 1.197 1.560 73
Other swap products 1.398 3.705 4.723 238
OTC (total) 8.475 17.713 25.453 200
New possibilities however are opening up in "Pan-European-Equity
derivatives". DTB (Deutsche Termin B”rse - i.e. the German equivalent of
CBOE) has compared to MATIF (French derivatives market) the advantage
that the percentage of equity options is bigger. In any case one can expect an
increase in the number and flavor of derivatives, stemming from the new
products in the bond market. New products will be created, or gain in
importance, for instance the credit rating swaps, which will for instance
allow a separate risk management for loan defaults. The institution giving
the loan can thus limit its risk. A big potential is seen also in spread
derivatives. In case the volume of these products grows and the regulatory
problems, which are still opened, are solved, then the banks could issue loans
and at the same time buy a loan derivative, with the loan taker taking over
the cost of the derivative. This way a much more efficient way of handling
default risks is made possible.
The biggest-so-far derivative market, the London LIFFE, tries to neutralize
the growing dominance of DTB with the introduction of a new swaps
benchmark. However it looks as if the abstinence of UK from the monetary
union causes insurmountable difficulties, which for instance caused Chase
Manhattan and Salomon Smith Barney, two market heavyweights from US,
to announce they are moving the interest rate business from LIFFE to DTB.
This would mean that LIFFE would slowly but surely lose its dominance in
the short-term market. While the battle of the derivative markets for the
customer is still undecided, the increase of the importance of the OTC,
because of its greater flexibility, is not questionable any more (see table)
.
... end of part IV |
