Basics – Understanding CUS10 values using new weights

I just got the answers that I was looking for in response to a reader’s question on how to tie out the CUS 10 index valuation using the recently announced new weights.  The net impact of this corrected approach- this month- was a lower CUS index than a simple weighted average of the price of ten regional components.  It turns out that the negative performance of the NYM index, together with an increase in the weight of the NYM index, combined to pull the CUS index value to the lower 181.43 value than a simple weighted average (of prices) using either the old or new weights.

CUS new weights

 

What this new approach implies is that going forward CUS indices, and therefore “equivalency” prices on the CME CUS (10-city index) futures will depend more on % changes in the ten reference indices than a simple weighted average.

The table below shows my understanding of how the mid-market prices for five November series expirations might be used to value the CUS November expiration contracts and the correct approach going forward in the lower right corner.  That methodology takes the percent changes in contract prices (using the recent CS release as a starting point) times the new CUS-10 index weights to come up with a the percent change in the CUS index.  Note that it turns out -given how forward implied HPA tend to converge in today’s futures prices (not so last summer) -that all methodologies are close to each other, and the actual mid-market prices for the CUS futures (shown in the far left column).

Net, limited impact on the CME markets.

CUS new B

Feel free to contact me (johnhdolan@homepricefutures.com) if you care to discuss this blog or any other aspect of housing derivatives.