Time for another example of quarterly expirations/convergence example

The August 2018 (Q18) contracts will stop trading on Monday Aug 27 at 3 PM Eastern (note one hour before other contracts), and will be cash-settled on the Case-Shiller index values released by S&P on Tuesday Aug 28.  Recall that this August release of  CS #’s covers the period April, May, and June.  Since the contracts cash-settle in just over a week, and since the index calculations are done on home transactions that have already taken place, it can be argued that (for the most part) buyers shouldn’t pay more (on the Q18 contracts) than they expect from the index release on Aug 28, while seller should not sell for less.  As such the CME quotes might offer an excellent tool for (at least short-term i.e. next week’s) bracketing forecasts.

However, despite the fact that all data for Case Shiller index calculations is already available, in most quarterly expirations there typically are a number of index results that “surprise” this market.  ( I define a surprise as an index that is either lower than a bid, or higher than an offer, from the day before.  In theory, that shouldn’t happen, but it consistently does on some number of regions.)

The chart below includes historical index values, yesterday’s quotes on all 11 regions (one for the HCI-10 city index, and one for each of the ten components), and the bid/spreads. Bid/ask spreads average just under 1.0 across all Q18 contracts.  (This is slightly tighter than historical average.)   Note that the DEN contract was 216.8/217.0 for the minimum 0.2 spread.  On the other hand, the SFR bid/ask spread is the widest.

Finally, I’ve shown the mid-market price for the Q18 contracts versus the index value from a year ago.  The percentage gains show LAV and SFR CME quotes as consistent with > 10% HPA (looking backwards), while the CHI and WDC contracts are priced at levels consistent with those regions having (once again) the lowest HPA of the ten regions.

I’ll compare the actual Case Shiller numbers against final contract prices and will also offer my perspective on how forward contracts (X19) react, around mid-day on the 28th.

In the meantime, please feel free to contact me (johnhdolan@homepricefutures) if you have any questions on this blog, or any aspect of hedging home price indices.

Thanks,  John

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